VIII. TRADE AND PROJECT FINANCING THE EGYPTIAN BANKING SYSTEM The Egyptian banking system consists of 69 banks: four state-owned commercial banks, 26 joint venture and private sector commercial banks, 11 joint venture investment banks, 21 foreign bank branches, 4 specialized banks and 3 banks not subject to Central Bank of Egypt (CBE) supervision. With the exception of the three banks exempted from CBE control by law or treaty, all banks in Egypt are subject to CBE supervision. During the period 1957- 1974, only fully-owned Egyptian banks were permitted to operate in the country. Although the banking system has since been opened to private sector banks, the four state-owned commercial banks still dominate the banking market due to their large size in terms of assets, deposit base and branches. In 1974, Investment Law 43 permitted joint venture commercial and investment banks with a minimum of 51% Egyptian ownership into the Egyptian market. Law 43 also gave these banks equal national treatment and tax benefits. However, foreign bank branches were restricted to foreign currency business until the March 1993 amendment to Banking Law 37/1992 permitted existing foreign bank branches to engage in local currency operations. The banking system deposit base and loan portfolio totalled LE 129.4 billion ($38.6 billion) and LE 67.6 billion ($20.2 billion) respectively, at the end of June 1993. Total assets of banks were LE 198.3 billion ($59.2 billion). Banks are free to set their own interest rates and exchange rates, although the CBE provides informal guidelines, such as T-bill auctions and discount rates. The CBE regulates the banking system by setting reserve and liquidity requirements and rules for loan categorization. The minimum paid-in capital requirement for banks under the new Banking Law 37/1992 is LE 5O million ($14.8 million). A deposit insurance fund is being phased in, in compliance with Banking Law 37/1992. Membership in the fund is obligatory for all banks operating in Egypt, including foreign bank branches. Three American bank branches (Bank of America, Citibank, American Express), one Egyptian-American joint venture commercial bank (Egyptian-American Bank) and Chemical Bank, an offshore office, are currently operating in Egypt, although Bank of America has announced its intention to stop its operations here. Citibank and AmEx operate in both local and foreign currencies. Under Banking Law 37/1992 as amended by Law 101/1993, foreign banks operating in Egypt, whether joint ventures or branches, receive equal treatment and are subject to the same regulations as national banks. Due to the large number of banks now operating in Egypt, CBE policy regarding new entrants into the banking market, whether foreign or Egyptian, is very restrictive and no new banks have been licensed. FOREIGN EXCHANGE CONTROLS The GOE liberalized foreign exchange rates in February 1991, conducting transactions through two markets: the primary market for government transactions and the free foreign exchange market. Effective October 8, 1991, the primary market was eliminated, and all transactions now are effected through the free market. The Egyptian pound exchange rate versus U.S. dollar showed minor fluctuations from period May 1991 to May 1994 between LE 3.33 to LE 3.39 per USD. Foreign exchange is easily available in the banking system or in foreign exchange companies. As of 1 April, 1994, the CBE had accumulated $16.5 billion in reserves and remains a net buyer of dollars. A new Foreign Exchange Law was passed in May 1994 allowing individuals and legal entities to retain and to transfer foreign exchange in Egypt and abroad. The new law also stipulates that banks can engage in all foreign exchange transactions. Under this law, exporters and tourism companies are no longer obliged to repatriate their foreign exchange proceeds to Egypt. The only foreign exchange restriction is a five-year period for transfer of sale proceeds of real estate in Egypt owned by foreigners residing outside Egypt. Although the law does not specify the terms of transfer of sale proceeds, the assumption is that transfers will be made in equal installments over a five-year period. FINANCING AVAILABILITY The Egyptian banking system is highly liquid. Financing in either Egyptian pound or foreign currency is readily available. Banks are willing to finance activities in all economic sectors. Banks' foreign exchange proceeds increased significantly after liberalization of exchange rates. Many Egyptians transferred U.S. dollar holdings (abroad or in Egypt) to Egyptian pounds to benefit from high interest rates on the Egyptian pound relative to the U.S. dollar. Foreign exchange inflows slowed in 1994 due to the decline in tourism proceeds and a fall off in private transfers. The Egyptian pound deposit base also has increased substantially. Deposit rates rose to a high of 17% in 1992 and are currently at 10%, tax free. Although banks invested heavily in T-bills during 1991-1993, T-bill issuance has declined significantly in the past 3 months increasing banks' liquidity positions. On the other hand, loan demand continues to be low due to the current recession. The loan/deposit ratio at the end of June 1993 was 52%. Although banks are suffering from excess liquidity, they are not willing to take substantial risk. Hence, banks' financing is generally limited to well-established companies or individuals. Lending rates have fallen from a peak of 21% in some months during 1991 and 1992 to an average of 15% in May 1994, while the prime lending rate is much lower. Other sources of finance are very limited. Investors seldom approach the bond or stock markets for financing. In the first quarter of 1994, the securities market started showing some signs of growth, as companies began to consider issuance of new bonds or stocks to finance expansion. Egypt has no venture capital companies, although their establishment is allowed under Capital Market Law 95/1992. EXPORT FINANCING AND METHODS OF PAYMENT Local banking system and offshore banks operating in Egypt are the only source of finance for Egyptian exports. Export financing is usually short-term, ranging between three to four months, to cover the exporter's working capital during the production period. Banks decline to finance long-term export contracts, especially after the negative experiences of Egyptian exporters in the former USSR and Iraq. The exporter may use loans to finance imported inputs or locally produced ones. Banks prefer to lend exporters the same currency they will receive in payment for their exports to reduce foreign exchange risk. Banks finance 50 to 80% of the value of an export order, whether in the form of a contract, shipping documents or a letter of credit (L/C), depending on the credibility of the exporter. If the exporter is not well known in the market and does not have a proven track record, banks will request that the importer open a L/C to reduce risk. Requesting a L/C constitutes an additional cost to the importer, which may reduce the competitiveness of Egyptian exports. On the other hand, credit worthy exporters are offered direct overdraft facilities. Interest rates on export financing range between 1.5-2% above LIBOR. Banks deduct loan repayments from the export proceeds. In general, export credit is a revolving credit. Multilateral banks and funds do not provide export financing to Egyptian exporters. An African Export-Import Bank (AFREXIM) was established in October 1993 to offer low-cost financing for foreign and intra-African trade. However, the bank has not begun operations. The AFREXIM head office is located in Cairo. EXPORT INSURANCE Egypt has one export guarantee company, established by Export Development Bank, National Bank of Egypt, Bank of Alexandria, National Investment Bank, Misr Insurance Company, Al-Shark Insurance Company, and Egyptian National Insurance Company. The Export Credit Guarantee Company of Egypt (ECGE) started operation in October 1993. It provides guarantees against importer's risk or political risk to Egyptian or foreign exporters who export products that are totally or partially produced in Egypt. "Importer's risk" is defined as the importer's inability to pay for the exported goods or his/her refusal to receive the shipping documents of exported goods, although the exporter fulfilled all obligations. ECGE's guarantee also covers political risk (non-commercial), including the cancellation of the importer's license by his/her country's authorities, refusal of entry of goods by the importer's government, denial of permission to transit a country's territory, seizure or confiscation of exported goods by the importer's country or the transit country, insolvency of a public-owned importer, or military actions or civil disturbances that affect the importer's assets. The guarantee, on the other hand, does not cover foreign exchange risk and risks pertaining to the nature of the goods. Whenever the ECGE receives a request for guarantee, it investigates the importer thoroughly. Based on the importer's financial status and estimated country risk, ECGE decides on a coverage limit and informs the exporter. The guarantee can reach 80% of the importer's outstanding debt. ECGE receives 0.5-2% premium depending on the importer's country and the product exported. The exporter can sell the guarantee to his/her bank. PROJECT FINANCING Banks are the main source of finance for projects in Egypt. As mentioned above, banks are highly liquid in both local currency and foreign exchange and are competing to finance credible, well- known clients. Egyptian pound lending rates have fallen considerably from a peak of 22% in 1991 and 1992 to an average of 15% in May 1994, while the prime lending rate is much lower. Egyptian investors do not resort to stock or bond markets to obtain capital. The Cairo and Alexandria stock exchanges have been dormant since 1956. A new Capital Market Law 95/1991 was issued to help activate the securities market; however, its impact thus far has been marginal. A recent bond issuance may indicate that investors are aware of the importance of bonds as a source of finance. U.S. EXIM Bank loans and guarantees are available in Egypt. However, EXIM interest rates are considered high compared to financing available from local banks. Small investors, who lack the right business connections, find it difficult to start up small or medium-size projects. (Though banks are suffering from excess liquidity, they are unwilling to undertake substantial risk.) On the other hand, the Social Fund, established to cushion the impact of economic reforms on low- income groups, is providing funds to banks to lend to small-scale enterprises. A private sector credit guarantee company started operation in mid-1991 to encourage banks to finance small-scale enterprises. The Credit Guarantee Company guarantees 50% of a bank's loan to a small-scale enterprise. The company also provides services to small investors to help them choose suitable projects and to prepare feasibility studies.