By Mohammad Baali
Albawaba.com - Egypt
Egyptian bank mergers have become a hot issue, and many discussions are underway as to how such moves could boost efficiency and develop capital bases.
The issue is made more pressing by the fact that available statistics show Egyptian banks to be weak, in capital base terms, in comparison with their international counterparts.
According to the annual list published by Banker magazine in July 2000, only nine Egyptian banks are qualified, in terms of capital and according to Basle Committee standards, to be listed among the largest 1,000 international banks.
The total capital of banks operating in Egypt, according to July 2000 statistics, amounts to $6 billion, which would qualify all these banks, considered as one entity, to rank 70th at the international level.
These statistics reveal the extent of the capital base weakness of Egyptian banks, particularly under the law before 1992, which did not require a minimum amount of capital for the establishment of banks. Afterwards, the law required a minimum of 100 million pounds as a declared capital for establishing a bank, and a minimum paid-up capital of 50 million pounds.
The Egyptian Arab Bank’s research department manager, Mohammed Nooriddin, told Albawaba.com that the latest spurt of reported bank mergers were significant because of the readiness of small banks to compete with major ones.
This came, he said, against the backdrop of the GATT agreement, which is due soon, since competition provided small banks with many options, including mergers.
Nooriddin added that there were other limitations that made mergers an urgent need for small banks. He cited the heavy financial burden of upgrading technology as an example, including the development of a bank technology base, or the installation of ATM machines. Furthermore, he said, human resources development, whether through training or recruitment of competent employees, required large expenditures that small banks could not afford.
Commenting on the problems that could hinder mergers, Nooriddin pointed to the difficulties of fairly valuing these banks, given the fact that most of them suffered from bad debts.
The manager said that in such cases “we should wait until the debt-structuring period is over, otherwise the banks will be greatly undervalued.”
Furthermore, he said, there were other problems arising from the willingness of bank managers to keep their institutions unmerged even when it was in the bank’s own best interests.
He added that there should be incentives and mandatory actions to encourage mergers, such as setting a high minimum capital limit for the establishment of a bank.
Jordan, for example, exempted merging banksfrom some control measures, such as liquidity regulations, in the 1990s.
Nooriddin pointed out that small banks’ mergers might not be a successful solution for their problems, because other small banks had many similar woes.
Therefore, the de facto solution, the manager said, was to have major banks acquire small ones.
He cited the example of the mergers “now happening, where major foreign banks buy small Egyptian banks, but we should be conservative due to the impact such actions could have on the national economy.”
A report entitled Strategic Economic Destinations, 2000 released by the daily Al Ahram also deals with the issue, but criticizes the central bank’s intervention to save small banks, as well as its announcement that the state will not permit the failure of any bank.
The report points out that such policies will not prompt small banks to merge voluntarily with others.
On the same issue, a member of the Egyptian National Bank board, Hafez Al Ghandour, submitted a study to a conference held by the Arab Banking Union on mergers in the Arab banking sector.
The report, which Albawaba.com obtained a copy of, confirms that the huge volume of capital resulting from the merger process is not in itself a measure of success. Instead, it says, the positive results of the merger are the measure. Mergers, it says, should not be just an aggregation of establishments in small numbers, which constitutes a monopoly, because this negatively affects banking services as a whole.
It also affects the national economy in general, says the report, so Egyptians should be certain of the long-term impact of the merger and ensure that they add value to the sector.
Finally, the study points out that this can be achieved only through information and transparency, which provide all the detailed data on mergers and restructuring, particularly with regard to bad debts.
