The structure of the Egyptian banking sector witnessed a number of changes since the 1950s; yet, none of these changes had fundamental impact on resource allocation and ownership concentration. Since Sadat&rsquo;s introduction of the open door policy (infitah) in the mid-1970s, wealth and income distribution policies have been fiercely debated until today. While the banking sector plays a vital role in income and wealth distribution, few observers have discussed its impact on widening income and wealth inequalities in Egypt since the mid-twentieth century. For that reason, this article discusses the impact of financial sector reforms on the unequal distribution of financial resources in Egypt since the 1950s.
<h3 style="text-align: justify;">Wealth and income inequality in Egypt</h3>
There is a noticeable contradiction between conventional measurements of income inequality (like the Gini coefficient) and wealth distribution percentages in Egypt (estimated by The Credit Suisse Research Institute). On the one hand, the Gini coefficient illustrated a declining trend in income inequality, while the wealth of the top&nbsp; one percent and 10% of the population continued to grow during the last two decades. Declining from 32.8 in 1999 to 29.8 in 2012, the last available Gini coefficient estimation was 31.8 in 2015, which is very low according to international standards; hence, suggesting that Egypt is among the most egalitarian countries in the World (World Bank, 2017). On the other hand, Credit Suisse ranked Egypt among the top 12 countries with high levels of wealth inequality, and one of nine countries witnessing extreme growth of wealth inequality in the last decade. According to Credit Suisse&rsquo;s data, the wealth shares of the top 10% of the Egyptian population increased from 61% in 2000 to more than 73% in 2014, and from 31% in 2000 to 48% in 2014 for the top one percent (Credit Suisse, 2014).
<h3 style="text-align: justify;">Half a century of financial reforms and concentrated ownership</h3>
Twentieth-century reforms
During the adoption of nationalization policies under Nasser&rsquo;s presidency, Law no. 22 of 1957 was issued to abolish the operations of British and French banks in Egypt. The law further suppressed small banks by mandating that paid-up capital should not fall below EGP 500,000. Small banks under the new law had to either merge with well-established ones or end their operations. Such measures reduced the total number of banks from 35 in 1957 to 27 in 1958. Consequently, the banking sector was later completely nationalized and the number of banks reduced to only four banks: National Bank of Egypt (NBE), Banque Misr, Banque du Caire and Bank of Alexandria. Accordingly, state-owned banks were politically instructed to only channel financial resources to the public sector (Mohieldin, 2000; Roll, 2010).
In 1975, however, no radical changes were witnessed after the issuance of Law no. 120, which aimed to liberalize the financial sector under Sadat&rsquo;s economic liberalization policies (&lsquo;infitah&rsquo; or open door policy). Although both domestic and foreign private capital was permitted in the banking sector, the law did not reduce the dominant share of state-owned banks in credit and deposit markets; nonetheless, they remained subject to direct government interference. Additionally, <a href="https://www.philadelphiafed.org/-/media/research-and-data/publications/business-review/1988/brmj88pc.pdf?la=en">joint-venture banks</a> also faced numerous government pressures to influence their credit policies, since they had control over public sector shares. During this period, the politically-connected elite enjoyed borrowing the vast majority of credit, without strict consideration of the profitability of their investments (Mohieldin &amp; Nasr, 2007).
The escalation of fiscal deficit forced the government to adopt a structural adjustment program in 1991, in line with agreements made with the International Monetary Fund and World Bank. As a result, the government encouraged the privatization of joint-venture banks and the big four public banks were instructed to decrease their shares to less than 20% in joint-venture banks. Under this financial reform program, banks&rsquo; lending and deposit rates were liberalized, leading to positive real rates of return. Furthermore, capital adequacy requirements increased, reserves and liquidity requirements were improved, and foreign exchange exposure and credit portfolio concentration were limited by restricting lending to a single borrower (Mohieldin, 2000; Mohieldin &amp; Nasr, 2007; Roll, 2010). Seven years later, the public-sector continued to possess more than half of these 35 banks, and the state maintained minority ownership [either directly or indirectly] in all private banks (Roll, 2010).
Twenty-first century reforms
The banking sector then witnessed major reforms in the early twenty-first century with the introduction of Law no. 88 in 2003. These reforms helped in increasing the number of banks controlled by foreign entities from only five in 2004 to 15 in 2008. Private banks&rsquo; shares in the total assets and deposits exceeded 50% from only 20% in 2004, and non-performing loans dropped to less than 15% (World Bank/International Bank for Reconstruction and Development, 2008; IMF, 2009). As a result of these reforms, 1) the number of banks fell to 38 by 2016, 2) one of the four state-owned banks [Alex Bank] was privatized to Intesa Sanpaolo, and 3) state banks sold a large portion of their shares in private joint-venture banks (Diwan et al., 2014). According to Farazi et al., the share of state banks in total asset fell from 79% in 2001 to 56% in 2010 (2011). Additionally, non-performing loans decreased from 26.5% in 2004 to less than 14% in 2010 and total <a href="http://www.businesspundit.com/encyclopedia/economics/domestic-credit/">domestic credit</a> [as percentage to GDP] went down from 105% in 2003 to 69% in 2010 (World Bank, 2017). &nbsp;Still, these improvements in macro-indicators of the financial sector did not benefit the majority of the population. Instead, they favored the country&rsquo;s richest businessmen in cabinet, parliament, and high positions in the ruling party [National Democratic Party], who influenced government decisions and benefited from these reforms.
During Ahmed Nazif&rsquo;s cabinet [2004-2011], politically-connected businessmen had preferential control over major economic sectors. This was evident by the establishment of real-estate projects and tourist resorts on lands previously owned by the state, in the absence of open and transparent tendering processes. Moreover, politically-connected firms benefited from their relationship with the state to ensure preferential licensing and the imposition of entry restrictions on potential competitors (Diwan et al., 2014). Court sentences that followed the 2011 revolution shed light on the purchase of government-owned land at below-market prices, the manipulation of regulations to suppress competition, subsidized loans from state banks, preferential access to subsidized energy for energy-intensive industries, in addition to privileged acquisition of state procurement contracts (Adly, 2009; Diwan et al., 2014).
Post-2011 financial reforms
Moving forward, the first microfinance law was issued in November 2014 [Law no. 141 of 2014], and in February 2016, the CBE instructed that 20% of banks&rsquo; loan portfolios should be disbursed to small and medium enterprises. Yet, the newly adopted policies did not prove to be sufficient in enhancing the allocation of credit or improving income distribution, thus far. This has been evident as the loan portfolio for small and medium enterprises of the NBE [as percentage from the total loan portfolio of the bank] decreased from around 13% in June 2010 to around nine percent in December 2017. Similarly, the domestic credit to private sector percentage [from total GDP] declined from around 51.9% in 2000 to 26.3% in 2015, before it increased to 34.1% in 2016. During the same period, total domestic credit by financial sector increased from 89% in 2000 to nearly 120% in 2016 due to massive increase in net credit to the government caused by increasing fiscal deficit.
Currently, 38 banks, 818 microfinance institutions and 4310 agricultural credit cooperatives operate in Egypt. The Central Bank has not approved a new banking license since 1979; thus, new investments in the banking sector are only possible through acquisitions of existing banks, which maintains the ownership of the state and few investors of the entire sector. According to the CBE, the total assets of commercial banks at the end of September 2017 was EGP 4,689 billion with EGP 1,423 billion in loans and discounts, while the top five banks held around 64% of the total assets and 60% of loans and discounts (CBE, 2018).
<h3 style="text-align: justify;">Conclusion </h3>
Several financial reforms took place in Egypt since the 1950s, yet the banking sector remains duly underdeveloped or, at least, underutilized. Following the change of the political regime in 2011, the government introduced a few financial policies, with a claim of improving the depth and outreach of financial services, improving the allocation of financial resources, as well as safeguarding the stability of the financial sector. Nonetheless, the vast majority of Egyptians remain excluded from these financial services and the formal economy. In an economy with persistent high and increasing wealth and income inequalities, the quest for alternative financial solutions and banking models becomes highly important. There is a dire need to change the structure of the financial sector in Egypt, in terms of control and ownership of financial resources and the performance and allocation of these resources. In the next commentary, I discuss the potentiality of forming cooperative banks as a promising alternative banking model that can significantly improve wealth and income distribution in Egypt.
<hr>
References
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