The problem of employment of liquidity in local currency at banks in the Egyptian market dramatically increased recently. It added to the banks’ suffering since the 25 January Revolution in 2011. It is considered one of the most important challenges the new governor of Central Bank of Egypt (CBE) Tarek Amer is facing.
According to the indicators issued by CBE, banks tended strongly to employ its local currency liquidity in tools, such as deposits and corridor, treasury bills and bonds. Lending operations are moving very slow, driven by some syndicated loans that are arranged for the benefit of certain economic sectors, such as the oil sector.
Last week, 29 banks operating in the domestic market offered to invest EGP 251.8bn of their surplus liquidity in local currency through CBE’s deposit operation.
Through the operation, banks invest their surpluses liquidity with a yield of 9.25%, for one week duration. Banks then recover liquidity from CBE and are allowed to frequently reinvest this liquidity through the same mechanism.
CBE accepted EGP 150bn of total liquidity that banks offered. Banks also employ some EGP 20bn a day in the corridor operation at CBE, at a yield of 8.75%.
Banking expert and board member of the Suez Canal and the Arab-Sudanese Bank Mohamed Abdel Aal explained that the volume of deposits in the Egyptian banking system stood at about EGP 1.7tr until last June. In return, lending and financing of all kinds during the same month recorded at EGP 714bn.
Abdel Aal said this means the average ratio of loans to deposits operating in the Egyptian market in banks are up to 42%, a low rate for a country aspiring to a reasonable economic growth rate.
The increase in funds offered for investment in fixed income instruments at the expense of lending activity is driven by a number of reasons, including the economic global and regional recession in the Arab region and the Gulf, which hinders local economic growth rates and reduce demand for loans.
The decline in oil prices befuddled oil producing countries, including the Gulf, one of the most important funders of Egypt. Gulf investors represent the largest group of investors in Egyptian projects, which can also impact the demand for loans.
He said repercussions of the Arab Spring and increased country risk led bank administrations to adopt conservative financing policies to avoid potential credit risk. There are no detailed maps for major national projects, nor are there new good feasibility studies, which is emphasised by lack of specialised investment banks.
Abdel Aal said the severe shortcomings of foreign exchange sources necessary to finance foreign trade operations and importing of production inputs and spare parts for factories reduced demand for financing from local banks.
There is no coordination between the state’s monetary and fiscal policies, in addition to government bureaucracy obstructing the entry of businessmen in new projects, he said.
The weakness of capital and capital base of some Egyptian banks led to the decreasing demand for loans, where the banking system capital is estimated only at EGP 92.5bn and reserves are of EGP 50bn. Banks cannot lend more than 25% of their capital base to any groups and 20% to individual institutions.
Banking and economy expert Ezz El-Din Hassanein said banks often want to invest in fixed income instruments for several reasons. They want to have excess liquidity in local currency, which can be invested safely in financial instruments at a stable and appropriate yield.
Hassanein said the decline in demand for bank credit, especially in times of economic downturn or unstable circumstances, is among the most prominent pushing banks to invest their liquidity in these instruments.
“Banks’ investments in treasury bonds and bills specifically will continue as long as there is a permanent deficit in the general budget of the state,” Hassanein said. “Those investments may stop or decline when the deficit is reduced, when CBE cuts the yield on government debt instruments, or set a limit of investment for each bank according to their capital bases.”
Investing liquidity in government debt instruments exposes banks to government credit risk and also has negative impact on the economy that needs this liquidity to rotate the wheel of economic activity.
Osama Al-Manyalawy, deputy treasury manager at a private bank, said that banks have large local currency liquidity and that it is normal under the circumstances of the region that cause lack of investment opportunities for banks.
T his situation may last until an economical breakthrough can bring banks back to their main job of granting loans to different projects, he said.
There are no other current and safe alternatives for banks to employ their liquidity but CBE tools such as corridor and deposits, treasury bills, and bonds.