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Egypt is launching a sweeping reform of its banking sector to prepare for the privatisation of the country’s state-owned banks and open up the industry to foreign investors.

Under a five-year plan approved by President Hosni Mubarak, the government wants to integrate small banks into their parent companies, reorganise public banks, broaden the capital base of mixed-ownership banks, merge some banks, reinforce regulations and take action against bad and doubtful debts.

According to central bank governor, Farouk Abdul Baki al-Okda, the process will take up to a year.

Okda was appointed by Mubarak in December 2003 for a four-year term with a mandate to spearhead reform of the country’s banking sector.

Until 1997, Okda was based in the US, where he worked as an advisor to the Bank of New York.

He is widely viewed as a liberal economist, whose arrival on the scene followed a January 2003 decision by then prime minister Atef Ebeid to float the Egyptian pound.

The decision led to an immediate devaluation of the currency, which lost about 25% of its value.

Since July, however, the pound has largely stabilised, with the black market rate against the dollar and other hard currencies roughly matching the official rates at banks and exchange bureaus.

The reform-minded government of Prime Minister Ahmed Nazif took office in July pledging to turn around Egypt’s ailing economy and rein in high inflation, skyrocketing unemployment and a huge debt burden.

Recently, the government announced tariff cuts on most imports in a bid to invigorate the economy and spur growth.

The future of Egypt’s banking industry, which is dominated by a handful of state-owned institutions, has been a hot topic for years.

Egypt has 64 banking establishments, including the major state-owned banks Al-Ahli (the National Bank of Egypt), Misr Bank, the Bank of Alexandria and the Bank of Cairo.

Of these, 28 are commercial banks, 31 investment banks, and three banks specialising in agriculture, real estate and industry. Two have special status – the Arab International Bank and the National Investment Bank.

The main privately-owned commercial banks listed on the Cairo stock exchange are Egyptian, American, British and French, and had a combined market share of 13% in 2004.

These banks were launched after 1974 when then president Anwar Sadat announced his policy of economic liberalisation ending years of state intervention and protection.

Reform of the financial sector began in June 2003 with the passing of a new banking law that was aimed at bringing the country’s institutions in line with international rules and standards.

These included statutory conditions for minimum capital, reserve limits and liquidity ratio.

The same law established a national register for all private loans and loans issued to corporations. The aim was to provide some protection against money laundering, and bad and doubtful debts.

Egypt was removed in February from the blacklist of the international watchdog, the Financial Action Task Force on Money Laundering.
But pressure persists for more broad-brush reform, with a root-and-branch overhaul of management and major redundancies to reduce personnel costs.