Despite a decade of reform in Egypt's banking sector, the system remains overbanked and dominated by four state-owned commercial banks which have yet to provide a lead in modernising the sector.

Hopes of major reform in the sector had been pinned on gradual privatisation, though this has now been put on hold. While the government is now about to sell its remaining stakes in two joint venture banks - Misr American International Bank and Misr Iran Bank - these moves were ordered in 1996 and are not expected to mark a substantial shift in the liberalisation of the sector.

"The government's commitment to privatisation is judged according to the criteria that were used in the South America of the early 1990s," says Youssef Boutros -Ghali, minister of economy and foreign trade.

"These criteria are no longer relevant. The relevant criteria are less flashy, and involve for example the unification of seven import and export authorities into one. This is a major shift. I have begun pecking at the bureaucracy. Half of our banking system is in private hands, and the supposed efficiency gains from privatisation are not as large as might be expected," he says.

Having quietly dropped the idea of pursuing privatisation in the immediate future, the government appointed a new chairman to head Banque du Caire. Ahmed el-Bardai, a former senior banker with Citibank and Arab African International Bank, was appointed with a brief to bring private sector experience to and raise the quality of the personnel. Similar moves are expected in other banks.

"The challenging task will be to bring some of the skills from the market, while at the same time identifying what are the existing skills in the bank and building the team from what already exists," Mr el-Bardai says. With 100,000 depositors comprising 65 per cent of bank assets, Mr el-Bardai believes he has a secure enough base to allow him time to concentrate on improving working practices within the bank.

However, competition with the leading private-public joint venture banks and foreign banks is becoming increasingly fierce. Even without privatisation, the public sector banks' share of the market has fallen by 10 per cent to 55 per cent in the past three years and by 23 per cent since 1990. For Banque du Caire, which is likely to become the flagship of the government's reform strategy, there is now increasing pressure to diversify its portfolio away from reliance on corporate clients and into retail banking.

"Banque du Caire only grew by 6 per cent last year, while the financial sector grew by 18 per cent," says Mr el-Bardai.

"There's a problem. I'm not catching up. I might not expand as fast as I would like. In the meantime, if we diversify, we will acquire a larger clientele, and we need a system that can handle that. The private sector banks have much more flexibility."

However, the extent of flexibility within the sector is currently being determined by the readiness, or lack of it, of the highly conservative Central Bank of Egypt (CBE) to foster a climate of reform.

"In the area of banking, what is going on is rather modest, if your aim is for Egypt to become the financial centre of the Middle East," says an analyst.

"You don't really have more than a few examples of major steps, notably Citibank taking a stake in EFG Hermes investment bank, and Robert Fleming buying into CIIC. These are positive developments, but they don't represent substantive extra leeway, which you perhaps would have had if market forces were able to enter more vigorously," she says.

The fear is growing that unless steady progress is made towards reforming the public sector banks, over which the CBE has considerable influence, their relatively low profit base will deem them uncompetitive in the liberalised market and undermine their potential when a decision is finally made to sell them.

"Despite the assertion by the government that a variety of measures have increased competition in the banking sector, this is hard to see," says a leading foreign banker. "In order to increase competitiveness there's a need to get rid of the over-reliance on law. Currently, nobody really knows what the true cost of banking here really is."

Intense competition from joint venture banks, such as Egyptian American Bank (EAB) or the recently-expanded Citibank, represent a serious challenge, particularly in the retail sector and mortgages. The expected passage of a mortgage law this year will mark a watershed in banking activity.

"Everybody recognises that the retail sector has been seriously under -banked. I don't think we have really touched the market," says James Vaughn, EAB managing director.

Resistance to banking reform from within the CBE has severely strained relations between reformers and central bankers and put plans for CBE independence on hold.

In the past year, the CBE spearheaded a policy of retaining tight exchange rates, and used public bank reserves to support the currency which most economic analysts agree is overvalued.

The liquidity crisis resulting from this measure, as well as foreign currency allocation restrictions intended to limit imports and redress a $12bn trade deficit, severely limited the growth rates necessary for economic reformers to prove unequivocally that their policies are working.

While the mishandling of the crisis has been blamed on Kamal el-Ganzouri, who was replaced as prime minister last October, pledges of a change in the established view that the exchange rate is a "sacred cow" which should be retained at all costs, have yet to be followed by action.

"There's an issue of balance of power within the system. The presidency doesn't see this as presenting a hurdle to progress, in part because of the [conservative] people who are advising the president," says one analyst.

Only recently has the CBE sought the means to improve the quality of its personnel. Unofficially, its directors have now also started discussing monetary policy, setting aside sessions for these discussions, which are not recorded in CBE minutes. While the CBE does not intervene on a daily basis, it has become more proactive, largely in the face of criticism of the handling of the liquidity crisis, which led to the downfall of the previous prime minister.

Now, the pressing need to address the question of currency devaluation is regarded by the CBE as the biggest hurdle it faces. While some economists are keen to see the currency fluctuate by 1 or 2 per cent, resistance to any shift away from the fixed rate remains strong.

eanwhile, the slow pace of reform has intensified concerns that, as Egypt remains poised on the edge of a recession, the tools necessary to ease the country into a new period of accelerated growth will have been lost owing to the squeeze on private sector credit and the loss of markets.


Keeping the foreigners happy
Struggling to spread its wings
With notable exceptions, unease still reigns
Banks race to follow where new arrival leads