Mysterious things are happening in Egyptian banks – Middle East Monitor


When the Ministry of Finance announces that the results for the first five months of the current fiscal year (2021-22) indicate a growth in the total budget deficit of 35% compared to pre-budget estimates, it is only natural that the government will miss payment to its creditors. Owners of medical supply companies complain that they have not been paid what is owed to them by teaching hospitals for four years. The contractors have also complained that they have not been paid for the price differences in their contracts with the government parties, which have been caused by the floating exchange rate since 2016. The Egyptian people have indeed watched the leader of the regime telling contractors working for government projects that they would be paid a quarter of what is owed, with payment of the balance being deferred.

As a result, these companies cannot repay loans to banks. This, in turn, impacts the quality and designation of bank loans and liquidity, especially since some of these banks have had chronic problems with delinquent loans. These include the Real Estate Bank, the Agricultural Bank and the Industrial Bank.

Some Egyptian banks have resorted to setting a maximum liquidity limit for money deposited by customers with them, set at 50,000 Egyptian pounds per day. This has been the case since the start of the coronavirus pandemic which has had a negative impact on the sales of many companies, including car manufacturers and dealers. Ultimately, this increases the difficulty of repaying loans on time.

Shortage of dollars in the banks

Due to the recession of the last year and more, which has resulted in low liquidity for individuals – much of what they had spent on medical care, health care and food – it is quite natural fact that the level of bank deposits is affected. This is all the more true as deposits from families and individuals represent 83% of total deposits in Egyptian banks.

Some have linked this to demands made by President Abdel Fattah Al-Sisi a few weeks ago that those building houses instead deposit their money in banks. And this despite the huge gap between supply and demand in the housing sector and the difference between investments and bank deposits, knowing that banks are generally not tangible investment vehicles and direct most of their investments towards the purchase of public debt.

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Banks also had to deal with a decline in foreign currency deposits and a shortage of foreign currency reserves. The net foreign assets of the banking system saw the difference between what is available to banks in terms of foreign currency and their own foreign currency liabilities, falling last year from $20.4 billion in February to $5.3 billion. dollars in November.

With the fall in the net assets of the Central Bank during this period, as well as in the other banks, the situation worsened in those of the latter whose net assets in foreign currencies fell from 6.8 billion dollars in February of last year to a deficit from July to October. The most recent data available show that this deficit is 5 billion dollars despite the withdrawal by the banks of part of their deposits in foreign banks. These offshore deposits rose from $21.4 billion in March last year to $14 billion in October. Additional borrowing from foreign banks brought total foreign lending from $8.7 billion at the end of 2019 to $12.2 billion at the end of 2020 and then to $14.4 billion at the end of September.

Profits are lower than the year when the pandemic was at its worst

Due to the Covid-19 pandemic, 2020 saw the closure of many economic sectors, including tourism and air transport for several months. There was also a ban on parties, exhibitions and similar events, meaning economic activity dropped dramatically. As a result, the profits of twenty of the twenty-three banks that published their financial statements also fell. In addition to this, the Central Bank has decided to reduce the interest rate by three percent.

Egyptian men wearing masks wait outside a center of the non-governmental organization Egyptian Food Bank to receive boxes of food aid on April 5, 2020 [MOHAMED EL-SHAHED/AFP/Getty Images)]

Considering the gradual return to normal conditions since the middle of 2020, the banking situation improved last year due to the change in the economic situation in which banks operate and the decision of the Central Bank not to change the interest rate during this period, not to mention the growth rates that the government talks about. However, it was noticed in the results of banking operations during the first quarter of the year that there was a decline in the profits of five banks compared to the same period in 2020, out of a total of nineteen banks which published their financial statements.

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In last year’s first-half results, contrasted by the lockdown that dominated the first half of 2020, profits for eight of the twenty-one banks that released their statements fell. This suggested real problems within these banks that were making the results of their operations lower than the results at the height of the coronavirus effect. In the third quarter of 2021, the profits of five out of nineteen banks that published their accounts fell.

Similarly, in the first nine months of 2021, six banks saw their profits decline compared to the same period in 2020, the peak year of Covid-19. The only bank to publish its accounts for the whole of last year so far, whose profits rose during the year by around 1.8%, saw its profits fall by 18% during of the last quarter of 2021 compared to the last quarter of 2020.

A strange way to display financial results

The factor that made the difference was the publication by public banks of their quarterly financial statements. It was commendable; what we have been calling for for years to follow the example of private sector banks. However, it was noticed that Egypt Bank, the second largest bank in the country in terms of assets and branches, compared the results at the end of September 2021 with the results of June 2020, a difference of fifteen month. It was also found that the statement of income and expenses for this quarterly period was missing. When a period of fifteen months is compared to twelve months the previous year, the longer period will always be preferred.

The same was seen when Al-Ahli Egyptian Bank’s third quarter results were released. It is the largest of all Egyptian banks. These results were for assets, deposits, loans and other items compared to June 2020 results, again a fifteen month gap. The report also referenced this year’s quarterly operations for revenue and expense versus fifteen-month performance.

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The two banks justified this by saying that they were changing the publication of results from the fiscal year to the calendar year. They added that it would be difficult to provide data for periods that correspond to the financial period for which the results are published.

The problem was exposed when the Egyptian Bank resorted to the same method in order to promote exports by comparing the results of the third quarter of last year with the results of June 2020 – again, a difference of fifteen months – although the private sector owns 25 percent of its shares. It is linked to the stock exchange and has for years published its quarterly data in the same way as private sector banks, where comparisons are generally made between a quarter and the corresponding quarter of the previous year. This is what Cairo Bank has stuck to despite being fully government owned. We have to wonder why Al-Ahli Egyptian Bank and Egypt Bank resorted to this method of disclosure, covering the results of operations in a way that has never been done before.

Keep in mind that these two banks are the two largest in Egypt. Together, they held 50.5% of total Egyptian bank assets at the end of last September and held 54% of deposits in all banks operating in Egypt. In addition, they provided 55 percent of the bank loans and held 44 percent of the equity interests.

The financial situation of the Central Bank needs to be strengthened

What has raised doubts about what is behind this accounting method is that by comparing previous statements released, it appeared that loans to Egypt Bank fell last September compared to the figure of last June. This is despite the increase in total bank loans during this period and the fact that the method of calculating loans in Egyptian banks takes into account interest on previous loans as part of net assets. This means that there has been a real decline in lending, with numbers higher than previously reported.

At the Egyptian Bank for Export Development, I saw a decrease in the bank’s profits in the third quarter of 2021 compared to the profits of the same period in 2020, and the same period in 2019 as well. This means that there had to be a reason for using the unusual accounting period of fifteen months.

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The Central Bank recently decided to make emergency liquidity available to banks in order to deal with the liquidity crisis in the short term. This differs from open market operations whereby the Central Bank purchases government notes from banks in order to inject liquidity into them. It also differs from the process of lending money to banks overnight at an interest rate of 9.25%.

The financial situation of the Central Bank at the end of last November was that it had assets of 2.4 trillion Egyptian pounds, while the assets of Al-Ahli Bank last September were valued at 2.8 trillion Egyptian pounds. Property rights in the Central Bank amounted to zero due to the exhaustion by referenced losses of each property right.

Ownership of Al-Ahli Bank was valued at 135 billion Egyptian pounds. This leads me to question the Central Bank’s ability to provide emergency liquidity to banks complaining of a shortage. The aforementioned ambiguities require an explanation and assurances from the banking supervisory authorities.

Translated from Arabi21, January 23, 2022

The opinions expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.


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