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Tuesday 10, April 2018 by Jessica Combes

Creating a world-class business landscape


In a bid to increase investment flows into the country, Egypt has introduced two new regulations to complement the investment laws it passed last year.

Following Egypt’s investment law passed in May last year, the government has also introduced two new counterparts—bankruptcy laws and a revised capital markets regulation. Both new regulations will likely improve the health of the banking sector and indirectly, the overall Egyptian economy.

Bankruptcy law
In late January the Egyptian parliament approved the country’s first-ever bankruptcy law in a bid to encourage both local and foreign investment in Egypt. The new law aims to tackle the outdated bankruptcy procedures that the country had relied upon. Previously bankruptcy cases were decided on a case-by-case basis with no specific law, which could lead to long and difficult judicial proceedings. Furthermore, the new law limits punishments to a monetary fine—previously debtors had faced jail time.

In a sector comment, Moody’s Investors Service said, “The new law is credit positive for banks because it will provide them with more options to deal with viable troubled companies, making loan workouts more flexible and faster. Additionally, the new bankruptcy law will speed up the liquidation of non-viable companies, which will increase recovery amounts.”

The law allows for out-of-court company restructuring and permits a standstill on creditors that allows a viable company to reorganise in a comparable manner to the US Chapter 11 bankruptcy protection. “The new law will allow borrowers and creditors to reach restructuring solutions more swiftly, increasing recovery amounts and improving banks’ ability to deal with problem loans,” added Moody’s. “Egypt’s weak insolvency framework has been a drag on banks’ asset quality. Indeed, the country’s two largest banks, National Bank of Egypt and Banque Misr have taken more than 10 years to recover from legacy problem loans and reduce their aggregate ratio of nonperforming loans to gross loans to around two per cent as of June 2017 from more than 25 per cent a decade ago.”

Egypt has struggled in many global indices, such as the Doing Business Report (dropping 18 places in the 2018 edition to 128 of 190) and the Global Competitiveness Index. This new law should help improve this situation, especially in rankings related to resolving insolvency—Egypt ranked 115 in this category in the World Bank’s 2018 Doing Business report. Moody’s noted that creditors in Egypt have on average recovered 26 cents for every dollar lent, in comparison to 71.2 cents in countries that are members of the Organisation for Economic Co-operation and Development (OECD).

Furthermore, bankruptcy proceedings have been known to take an average of 2.5 years, although there is some evidence to suggest that time period may be longer, in comparison the bankruptcy duration which is 1.7 years on average in OECD countries. The bankruptcy law was introduced to complement the investment law (passed by Parliament late last year) in order to attract foreign investors and reduce bureaucracy. Both laws are part of a reform process to drive investment, something Egypt’s economy has been struggling with in recent years.

Capital markets act
At the end of February the Egyptian parliament moved to amend the Capital Markets Act. The amendment was aimed to deepen the financial markets in Egypt by facilitating Sukuk issuances and the investors ability to hedge. The law’s amendments include the introduction of futures trading, a commodities exchange, allow the establishment of privately owned stock exchanges and reduce listing fees to 0.002 per cent from 0.005 per cent to encourage smaller companies to list on an exchange (the NILEX). The amendments also facilitate Sukuk issuance, set higher penalties for violations of the law and set up a federation for non-banking financial companies similar to the Federation of Egyptian Banks.

Moody’s has pointed out that the amendment is credit positive for banks as increased capital markets activity will contribute the banking sector’s income from their debt capital markets business while also providing funding options. Egypt’s capital markets are underdeveloped relative to other African peers. Egypt ranks 14th among the 17 African countries in the Barclays Africa Group 2017 Financial Market Index, which measures the openness and attractiveness of countries across the continent to foreign investment. Government issuance dominates Egypt’s debt market and listed equities are few. Although Egypt is the largest Arab country by population, the Sukuk market is inactive, something the authorities are aiming to address with the revised law.

Moody’s in its report also highlighted that Egyptian banks are financed mainly by deposits, which accounted for 71 per cent of nonequity liabilities as of October 2017. With this new amendment, the income banks earn from their debt capital markets activity may increase, diversifying their operating income, which is heavily reliant on interest income earned from investment in government bonds. As of October 2017, government bill and bond investments accounted for 31 per cent of banking system assets and contributed more than 41 per cent to banks’ interest income.

“Although banks will likely lose loan business as some of the country’s largest corporates begin to finance their operations through the yet-to-be developed debt markets, banks’ increasing lending to the country’s underserved small and mid-sized enterprises (SMEs) will support loan growth and profitability. Currently, local corporates finance their operations through bank loans, squeezing out SMEs,” explained the research and ratings agency.

Listed corporate debt issuance accounted for 0.5 per cent of listed bonds and the market cap of listed corporations accounted for 20 per cent of 2017 GDP. Increasing the products offered and investors’ ability to hedge will increase Egypt’s attractiveness to foreign investors, which would provide additional funding options for banks. As of October 2017, loans to corporates accounted for around 82 per cent of total loans.

To divert much needed credit to the SME sector, the central bank introduced regulations in 2016 requiring all Egyptian banks to allocate 20 per cent of total loans to SME loans by 2020. Local SMEs, which account for around 80 per cent of GDP and 75 per cent of employment, cite a lack of access to credit as a main impediment to their growth. Despite the central bank’s initiative, loans to SMEs remain low at around 10 per cent of total loans, according to our estimates.


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