BANKING IN EGYPT

On the occasion of winning the Best Investment Bank in Egypt for the fourth consecutive year, Global Banking & Finance Review spoke with Hassan Abdalla, CEO of Arab African International Bank about the banking sector in Egypt. 

Hassan Abdalla, CEO , Arab African International Bank
Hassan Abdalla, CEO, Arab African International Bank

In your view what is the current state of Egypt’s economy in terms of stability and potential for growth? 

Egypt is quite on track. The decisions taken by the Egyptian government lately aim to restore financial stability and investors’ confidence, while at the same time, increasing employment opportunities.

Aside from de-pegging Egypt’s Pound from the US Dollar, a number of measures have been taken by Egypt to rectify its large fiscal deficit. To name a few, introducing VAT & progressive taxes, slashing the public sector wage bill, and lifting of fuel subsidies were pre-requisites to approve the recent IMF loan. The move was applauded by Global Rating Agencies which have reaffirmed Egypt’s B-/B long and short-term sovereign credit ratings and revised the outlook from “negative” to “stable”. Hence, the structural reforms should aim to transform Egypt’s economy into a market-driven, private sector-led, competitive enterprise capable of generating high rates of inclusive and sustainable growth.

Egypt is a deep rich market with high resilience, and provides very lucrative returns compared to the risks entailed.

What impact are regulations and reforms having on the banking industry in Egypt? 

We are part of the global banking scene. Financial institutions across the world are facing many challenges, yet I am quite confident of the resilience of the Egyptian banking sector.

As we speak, the challenges facing the Egyptian banking sector are more or less similar to those facing banks worldwide.  We all have to adjust and revise our business models in a very challenging macroeconomic landscape. Topping the list is facing foreign exchange volatility, evolving international regulatory and compliance requirements including new risk management techniques and capital adequacy requirements in addition to tighter banking supervision.

Compliance cost, data reporting, and necessary IT infrastructure are becoming additional costly mandates. Basel III will add further capital and supervision requirements that will put pressures on banks’ profitability and trigger the risk – return trade offs.

Will banking remain a profitable industry? 

It is no longer business as usual.  Banks cannot sustain their profitability unless they undergo a fundamental revision of how they do business, revise policies, systems, structures, including development of human resources skills. It is quite challenging.

Zooming on specific challenges facing Egyptian banks, the main challenge will be adapting and coping with a very fluid and dynamic socio-economic landscape. Egypt offers a very rich landscape with a huge diversified economy, deep market and huge population of around 90 million inhabitants. This situation creates challenges as much as it creates opportunities. It all depends on your ability and agility to develop your business models to leverage opportunities. For example, Egypt has a young population whereby 60% are below the age of 30. This could be deciphered as a burden of unemployment but it also points the way that banks should shift their traditional operations towards micro-finance, entrepreneurship funding, along with small and medium enterprises. Financial inclusion has become a nation- wide mandate endorsed by the Central Bank of Egypt. Egyptian banks are faced with a new mandate, which requires new arrangements as it provides rising growth potential. In the same context, funding clean energy and energy efficiency is a new track that is becoming very relevant to the Egyptian context.

What opportunities do you see for foreign investments?

There are countless opportunities untapped for Egyptian and foreign businesses. Egypt is currently showing promising growth rates when compared other emerging markets. Investments in Egypt tend to provide relatively high return compared to risk. Egypt is characterized by a resilient economy that has been able to withstand and overcome internal and external shocks. Continuing with the structural reform program, Egypt is expected to witness an uptick in growth rates over the medium term due to the inherent advantages in the Egyptian economy; namely a large population, deep market and a highly diversified economy.

What advisory services does Arab African International Bank (AAIB) offer to help individuals and corporate investors achieve their investment objectives? 

AAIB is Egypt’s leading investment bank. Its distinction lies in being a front runner in providing outstanding investment banking and corporate finance services. We offer a plethora of financial advisory services, including distinct and tailor – made – not to mention solution – driven finance structures – customized to our clients’ needs across different sectors. These can vary from short to long-term loans. Our corporate portfolio services include advising on equity placements, mergers and acquisitions, feasibility studies, valuations, escrow arrangements, agency services and raising finance through syndicated loan market. We also lead the local debit capital market in terms of issuing corporate and securitization bonds. AAIB corporate services is backed by integrated services of its financial subsidiaries along with its regional branches.

Established in 1964, AAIB has a strong regional presence with branches in Egypt, Dubai, Abu Dhabi and Beirut. With 90 branches in your network, what are your plans for expansion and development of your self-service channels? 

AAIB is the only private Commercial Bank with growing presence in the region. AAIB’s presence in the region is not only by having branches in Dubai, Abu Dhabi and Beirut. AAIB has strong business relations with many countries in the region. It has deep business relations with leading corporates in Saudi Arabia, Kuwait, Bahrain, Oman, and Qatar.

On the other hand, AAIB has made a significant investment in expanding its local branch network. It aims to reach a network of 100 branches by the end 2017 with more focus on geographic footprint in Upper Egypt & the Canal Area. Egypt has a large youth population, which constitutes a great opportunity for retail banking growth. With a total number of banks in Egypt of 40, number of branches for total banks

in Egypt are only 3,824 as of December 2015 (CBE). Banking density is 1 branch for each 23,600 persons which is very low compared to the rest of the world. AAIB Network Expansion Strategy is enhancing its geographical spread across Egypt and enhancing its self-service channels. AAIB is targeting to be the third bank among peers in terms of customer reach by the end of 2017. The planned network expansion is to reach almost 100 branches by the end of 2017. The additional branches that will be launched during 2017 are scattered among different untapped governorates and include branches in strategic areas such as vital Egyptian ports.

As for the self-service channels, AAIB is targeting to grow its ATMs network to reach 410 ATMs towards the end of 2017. The bank also has 2 Auto branches. Moreover, the bank is conducting studies to introduce unmanned branches/ banking units in shopping malls, universities and residential compounds to improve customer reach and enhance customer experience. AAIB is also focused on probing Mobile Banking in 2017.

Enhancement in offering the payroll service as well as an ongoing innovation of new products and market segments introducing unique products and service offerings. In addition, improved and accelerated delivery channels through migration to ATMs and mobile payment gateways; and intelligently rationalize the branch footprint locally & regionally to increase banking penetration and outreach.

AAIB is now also preparing branches to serve for special needs and is planning to have 5 fully equipped branches.

AAIB has evolved from being just a bank to a fully integrated financial group offering asset management, brokerage, leasing, and mortgage services. How does this benefit your clients and what plans do you have for future growth?

AAIB’s mission is to offer a continuously evolving array of services to the entire region, developing new business arms to that effect. The Bank’s growth was propelled in 2008 with the establishment of four subsidiaries; Arab African Investment Holding (AAIH), Arab African Investment Management (AAIM), Arab African International Securities (AAIS), Arab African International Mortgage Finance (AAIMF) and the newly established in 2014 Arab African International Leasing (AAIL). The establishment of which transformed AAIB from a Bank to a full- fledged financial group. Therefore, AAIB has realized the benefit of synergies and consolidated services to our clients through its financial arms, perfected by a related diversification within the financial services markets. Moreover, the bank is planning to launch “SANDAH” with KFW Bank aus Verantwortung, a green field microfinance company that will serve the untapped microfinance segment in Egypt.

AAIB recently signed a memorandum of understanding with the General Authority for the Suez Canal Economic Zone. Can you tell us more about this agreement and what it means for investors? 

AAIB is the first regional bank to conclude   a MOU with the General Authority for the Suez Canal Economic Zone(SCZone)on January 3, 2017. It aims at providing investors with bank’s unique financial and investment products and services, which will definitely help to boost the flow of investments into the region. Enacting the MOU, the bank will have the right to arrange and fund loans, offer its distinctive banking products, and provide investors with bank’s renowned financial advisory services. Besides holding projects and partnerships between the public and private sectors including navigation sector and its affiliated ports. That’s in addition to the participation in providing funding alternatives for all economic activities including the industrial activities.

SME’s represent a large portion of Egypt’s GDP. What are the biggest challenges facing SME’s right now in Egypt? 

The role of SMEs proved efficacious in the development of many economies around the world including the United States and China. That is because they are easily initiated and carry benefits to the citizens as well as the state.

The SMEs may be the best solution for Egypt’s current economic state as a long term objective. SMEs have the ability to provide a large number of jobs to subdue unemployment and substitute imports of finished goods. Egypt has a total of 6.4M enterprises, whereby only 400K are formal.

Although the government has taken steps to bolster the sector, little success has resulted. Compliance with the new norms requires working on the demand and supply side categorically.  Initiatives in financial literacy, KYC, and leveraging on bank’s infrastructure might precede lending to SME clients.  Commercial banks are yet to remain conservative with respect to lending to this segment.

Egypt’s SME sector remains underdeveloped with less than 8% of total firms have credit. The main challenges facing borrowers are collaterals, access to finance, and lack of entrepreneurial skills and managing accounts. Banks have to be equipped with the necessary infrastructure, training of manpower, delivery channels, business and operational model, credit and risk management.

The program recently launched by the Central Bank aims at increasing the SMEs lending share of total banks’ portfolio to 20% over the next 4 years.

In this context, we are constantly building the infrastructure necessary to substantiate this move. We are structuring a fully-fledged specialized SMEs unit inside our bank, considered the best new revenue streams.  We have also focused on investing in training emerging calibers from the corporate and retail lines of business to build a strong knowledge base in SME funding and through a joint training program with Frankfurt School of Finance & Management.

Can you tell us about some of the support services you offer SMEs and how does the support offered to SME clients differ from the needs of large corporations? 

As I mentioned before, the bank is planning to launch its SMEs company “SANDAH”.A green field microfinance company will serve the untapped microfinance segment in Egypt. Creating a completely new microfinance institution that requires an innovative, proactive approach to the challenges of risk assessment and efficiency of the low and middle-income segment. AAIB’s role would be enhancing access to credit vital to Egypt’s economic growth and job creation.

The support given to the SMEs differ from the needs of large companies in many ways. A crucial element in the development of the SME sector is access to finance, particularly to bank financing, given the relative importance of the banking sector in serving this segment.

Small businesses cannot usually afford to pay for the kind of accounting and book keeping services they need, nor can their new employees be effectively tested and trained in advance. Moreover, to compete in global markets, SMEs need to develop new business strategies and deploy new technologies.

SMEs provide tremendous growth potential but require a healthy ecosystem to evolve in scale.

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