Cbe and Basel i & II Fall

Central Bank of Egypt

Egypt has a population of approx. 78 million, but it is estimated that only 10% have a bank account.

The Central Bank of Egypt (CBE) , the country's central bank, was founded in 1961. The bank had a total paid up capital to the extent of 1,000 million Egyptian pounds. Since then the bank has been operating as an independent body.

CBE conducts supervision over banks in Egypt to ensure the soundness of their financial position and to evaluate their

performance from the perspective of risk-based supervision.

http://www.centralbanknews.info

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Banking Sector Structure Majority loans are to the corporate segment, with retail sector loans making

up 19% of total loans and 7% of assets, nonetheless growing significantly.

The SME sector is also underserved, as SMEs account for 80% of the private

sector workforce, but only a fraction of their working capital requirements are

financed by banks. That is why the Egyptian government launched NILEX

NILEX (Nile Stock Exchange , established 2007) is the Egyptian Exchange'

market for growing medium and small companies ( with maximum paid in

capital 50 million L.E.).

The number of listed companies in NILEX is only 19 companies.

http://nilex.com.eg


Important objectives of the bank are as follows: Issuance of Banknotes

Maintaining Price Stability

Managing the gold and Foreign Exchange Reserves

Implementing monetary and credit policies

Supervising the national payments system.

Recording and following up Egypt's external debt (public and private)

It is worth noting that the public debt estimated at 2010 to be around 89.5% of GDP (1,080 billion Egyptian pound) .The figure includes domestic debt of 888 billion pounds, equivalent to 73.6 percent of GDP.

.The gross external debt reached approximately 35 billion US dollars (15.9% of GDP) in June 2011

Foreign currency reserves stood at $25.01 billion in August 2011


Important objectives of the CBE are as follows:

Checking whether banks are complying with CBE regulatory standards including:

Minimum reserve and liquidity ratio

Maximum limits of a banks exposure to a single customer

Banks connected parties and exposure to abroad

The asset-liability matching in terms of maturity and currency.

Regulatory Standards

Minimum paid-up capital requirement of EGP 500 million for domestic banks and US$ 50 million for branches of foreign banks.

Minimum ratio for capital base to risk-weighted assets of 10%.

Liquidity ratio of 20% on the Egyptian pound portion of their liquid liabilities, and 25% in respect of their foreign currency portion.

Minimum cash reserve requirement with CBE of 14% of average 14-day local currency deposits and

10% of average quarterly foreign currency deposits.

Excluded are local currency instruments with maturity above 3 years.

Egyptian pound reserves are non-interest earning, unlike foreign currency reserves

Highest liquidity level in the region

Egyptian banks have been historically characterized by high liquidity levels as evident by their low loan to deposit (LTD) ratio compared to regional peers.

In fact, the LTD ratio has dropped from 74.0% in 2002 to 52.3% at the end of September 2009 to reach one of the lowest levels, not only on a regional scale, but also globally.

Highest liquidity level in the region

Egypt is distinctly underleveraged with a LTD ratio of 52.3% for banking in

September 2009. Whereas the high liquidity ratio provides comfort to investors at

times of economic slowdown, it is often looked at unfavorably at times of an

economic boom.

We believe that the main factors that led to such a low LTD ratio are:

1. Rigid credit policy implemented by the CBE in an effort to improve the quality of banks' balance sheets.

2- The concentration of credit to blue chip corporations. (A nationally recognized, well-established and financially sound company)

3- Reluctance to aggressively penetrate retail and SME segments.

4- Attractive yields on government securities

Regulatory Standards(cont.) Bank placements (excluding branches of foreign banks) with a single

correspondent abroad should not exceed 10% of total placements

with correspondents or US$ 3 million, whichever is larger, taking

into account that total placements should not exceed 40% of the

banks capital base.

The maximum single obligor exposure (including related

parties) has been reduced to 20% from 30% and 25%

previously.

Egyptian Banking Sector

The Egyptian banking sector faced serious problems in the last few years.

This is due to the fact that, before 1990, the Egyptian banking sector was controlled mainly by state-owned banks

Egyptian government imposed barriers against the entry of foreign banks. This is done by applying restrictive regulations

Non-profitable banks were supported by the government and were left to operate while measures such as restructuring and merging were not applied


NPL accumulated and reached its peak due to sever corruption associated with the lending activity, the weak supervision by CBE, lacked innovation, poor quality of governance structure and poor asset quality

Besides, Egyptian government forced banks to lend state-owned companies; which resulted in 30bn EGP was owed by such companies to the four state-owned banks.

This resulted in an inefficient and uncompetitive banking sector which consequently leads to a poor level of financial intermediation


Egyptian government started to implement the first stage of the Financial Sector Reform Program (2004-2008), authorized in September 2004.

The first stage focused on four pillars:

(1) removing government demonization on banking sector and restructuring state-owned banks

(2) raising the minimum capital requirement for banks,

(3) strengthening the banking supervision at CBE,

(4) addressing of the problem of NPL.


1. Egyptian government started with the privatization of state owned banks and the divesture of the shareholding of state-owned banks in a number of joint ventures and foreign banks

80% of Bank of Alexandrias stake - the fourth largest state-owned bank - was sold to Italys Sanpaolo IMI Group for USD1.61 billion


National Bank of Egypt issued 20% of its equity stake through Global Depositary Receipts (GDR) on the London Stock Exchange. GDR are certificates that represent an ownership interest in

the ordinary shares of stock of National bank of Egypt , but that are marketed outside of the banks home country to increase its visibility in the world market and to access a greater amount of investment capital in other countries.

Individual investors in the countries where the GDRs are issued buy them to diversify into international markets. GDRs let you do this without having to deal with currency conversion and other complications of overseas investing.


2. Raising the minimum capital requirement for banks

Egyptian parliament passed a new banking sector law (Law No. 88/2003) requiring a minimum capital requirement of EGP 500 million for domestic banks and USD 50 million for branches of foreign banks

The ratio of banks minimum capital requirements to their risk weighted assets has increased to 10% and an additional capital injection to all state-owned banks has been implemented

This forced many banks into mergers and acquisitions to meet the new capital requirements.


3. Strengthening the banking supervision at CBE:

The purpose of such reform is to assure that CBEs supervisory role is matching with the latest international standards.

The supervisory method implemented by CBE focused on evaluation of risks and assessment of the Egyptian Banks abilities to identify current and future risk.

CBE has the powers to investigate the transactions of banks and other financial institutions in order to combat money laundering


4. Addressing of the problem of NPL

The government rescheduled more than 45% of NPLs (26 billion EGP) and the outstanding loans of state-owned enterprises to state owned banks

This is done by swapping such loans for long-term government bonds to be repaid by debtor firms over 20 years

Each banking institution was obliged to install an internal audit department to avoid future recurrences of NPLs.


After the completion of the first stage of the reform program, the government will focus on implementing the second stage (2009-2011) of banking sector reform

This stage aims at :


1. Prepare and implement a comprehensive program for the financial and administrative restructuring of specialized state-owned banks (the Principal Bank for Development and Agricultural Credit, Egyptian Arab Land Bank, and Industrial Development and Workers Bank of Egypt), which is expected to positively affect these banks performance by the end of the second stage of the said banking reform plan

2. Follow up the results of the first stage of the restructuring program of the National Bank of Egypt (NBE), Banque Misr (BM) and Banque du Caire (BdC), which revealed that the first stage of the reform plan (2004/2008) had already yielded fruit and positively affected their performance levels.


3. Apply Basel II standards in Egyptian banks to enhance their risk management practices.

In this context, a protocol had been signed with the European Central Bank and seven European central banks to provide a three-year technical assistance program launched on 1 January 2009, to implement Basel II requirements in the Egyptian banking sector.

What do we mean by BASEL I & II???

Tasks Performed By Capital

Provides a Cushion Against Risk of Failure

Provides Funds to Help Institutions Get Started

Promotes Public Confidence

Provides Funds for Growth

Regulator of Growth

Role in Growth of Bank Mergers

Regulatory Tool to Limit Risk Exposure

Reasons for Capital Regulation

To Limit the Risk of Failures

To Preserve Public Confidence

Basel I and II

In 1988, the Basel Committee on Banking Supervision starts to set up rules and regulation aiming to enrich the stability and soundness of the international banking system

This ends up with the development of a new framework, which known as Basel I

For more detailed explanation see page 486

The Basel Agreement on International Capital Standards

An International Treaty Involving the U.S., Canada, Japan and the Nations of Western Europe to Impose Common Capital Requirements On All Banks Based in Those Countries

Basel I and II

Summary of Basel I : Primarily focused on Credit risk

Sets out simple rules for calculation of minimum regulatory capital by using a risk weighting framework

All assets are assigned a weight to reflect their riskiness

Assigned Risk Weight x Exposure = Risk weighted Asset Risk weightings at 0% (for cash, claims on central

governments denominated and funded in national currency), 10%, 20%, 50% and 100% (for claims on corporate)

Basel I and II

Summary of Basel I :

Sum of Risk Weighted Assets x Capital Ratio = Minimum Regulatory Capital Where Banks capital under Basel I is divided into two main parts:

Tier 1 (core) capital included the book value of common stock, non-cumulative preferred stock, share premiums ( surplus), retained profit (undivided profit).

Tier 2 (supplementary) capital included the allowance (reserve) for loan and lease losses, cumulative preferred stock, and long-term subordinate debt capital instruments.

Where subordinated debt capital representing long-term debt capital contributed by outside investors , whose claims legally follow the claims of depositors .

Basel Agreement Capital Requirements

Ratio of Core Capital (Tier 1) to Risk Weighted Assets Must Be At Least 4 Percent

Ratio of Total Capital (Tier 1 and Tier 2) to Risk Weighted Assets Must Be At Least 8 Percent

Basel I and II

Under Basel I , Banks with international presence are required to hold capital equal to 8 % of the risk-weighted assets

As a general role, risky assets (e.g., commercial loans and consumer instalment loans) require maintaining total equity capital equal to 8% of the assets book value.

On the other hand, risk-less assets (e.g. cash and government debt) have no-capital-requirements

Basel I and II The Basel II Capital Accord is Structured around three

pillars: Pillar One Minimum Capital Requirements

Recommend options of increasingly sophisticated frameworks to quantify credit and operational risks and allocate capital commensurate with these risks

Committee Objective: To provide a more accurate and risk sensitive approach to allocating capital to protect against the credit market and operational risk exposure

Basel I and II Pillar Two Supervisory Review Process

Stipulate the procedures that supervisors will have to undertake to ensure that Banks have sound processes implemented to monitor risk and capital levels accurately

Committee Objective: Create a framework to guide external and internal auditors in the supervision of Basel II compliance

Basel I and II Pillar Three Market Disclosure

Provides detailed guidance on the disclosure of the capital structure, risk exposures and capital adequacy of banks

Committee Objective: Create another layer of supervision by exposing banks capital structure, risk exposures and mitigation strategies to the public

Under Basel II , the basic capital requirements for banks (

8%) can be expressed as the ratio of banks capital to credit, market and operation risks

Basel I and II

Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Another term for credit risk is default risk.

An operational risk is, as the name suggests, a risk arising from execution of a bank's business functions. It is a very broad concept which focuses on the risks arising from the people, systems and processes through which a bank operates.

Basel I and II

Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices.

Islamic Banks

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics.

Sharia prohibits the payment or acceptance of interest fees for loans of money (Riba), for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles

Islamic Banks

The argument is put forward that an interest-based economy has a built-in tendency toward inflation, because the creation of money is not related to productive investment , either at the level of central bank or at the level of commercial banks.

Islamic banks capital structure rely mainly on their shareholders and depositors, who are primarily individuals. Within the banking community, Islamic institutions are rather small, because of their shareholder structure being made up of the general private public of the host country

Islamic Banks

Islamic Finance Institution may engage in the following activities for their customer:

a) Participation Financing (Musharaka) : The bank provides part of the equity and working capital requirement of a project, and shares with the entrepreneur any profits or losses. Profits are shared according to a pre-agreed ratio. Losses, however, are borne in proportion to the capital contribution.

Islamic Banks


b) Trust Financing (Mudaraba) : The banks provides all capital required. The clients provides the management skill for a given project, again on a predetermined profit-sharing basis. Losses , in this case, are borne by the bank alone, the client losing the value of his or her work

Islamic Banks


C) Cost-Plus-Trade Financing (Murabaha): The Financial institution purchases raw materials, goods, or equipment at cost and sells them to the client on a cost-plus-negotiated profit margin

D) Rental Financing ( Ijar): The bank acquires equipment or buildings and makes them available to the client on a straight forward rental basis.

Islamic Banks


E) Lease-Purchase Financing (Ijar we Iktina): The arrangement is similar to Rental financing that the client has the option of acquiring ownership of the rented equipment or building by paying installments into a saving account. The re-investment of this accumulated capital works in favor of the client , allowing him or her to offset rental cost.

Cbe and Basel i & II Fall

Documents

central bank of egypt

central bank of egypt

bank account

region egyptian banks

banks exposure

domestic banks

branches of foreign

foreign currency portion