Thursday, 10 December 2015

A contrarian view: The CBE’s approach to bank regulation is doing the economy a “monstrous disservice”

The Central Bank of Egypt is doing the economy a monstrous disservice — and it has nothing to do with the USD exchange rate.

While media attention around the CBE is focused on its management of foreign exchange rates, the CBE is quietly humming along in its role as regulator of Egypt’s banking sector — a sector that has a 10% penetration rate (defined as percentage of population with access to financial / money accounts). Egypt’s 10% banking penetration rate compares to rates of 70% in East Asia and 34% in Sub-Saharan Africa. Yes, Sub-Saharan Africa: The poorest region in the world has a banking penetration rate more than three times Egypt’s.

A low banking penetration means that Egypt’s is a predominantly cash-based economy, and the direct consequences of a cash-based economy are many: It is inefficient. It results in low tax receipts. It’s prone to corruption and drives more and more economic activity towards the informal sector.

The indirect consequences are greater still: The fact that 72% of homes in Cairo were built illegally (or otherwise in contravention of zoning laws) is not unrelated to the fact that 90% of the population does not have access to a bank account.

You might think that such low rates would present an incredible growth opportunity — one that would bring global banks running to Egypt. You’d be wrong. In recent years, Citi Bank, Société Générale and BNP Paribas have all exited their operations in Egypt. At least two other European banks have had their Egyptian operations on the block for years… and no buyers.  This is because by any standard, the CBE is a peculiarly conservative regulator, one that now presides over a sector that is dominated by state-owned and Gulf-based banks.

It is safe to assume that neither state-owned nor Gulf-based banks are at any risk of aggressively introducing innovative banking products — or shaking-up the status quo in Egypt’s cozy banking sector in any material way.

But the bigger tests are yet to come. The global finance industry stands on the cusp of a revolution. One in which digital wallets and money transfers replace credit cards and analogue transaction confirmation systems. One in which credit assessments are underpinned by big data analytics and the overall transactions costs across the economy drop sharply along with the ever-declining computing costs.  

Today’s question is whether the CBE is willing to embrace devaluation. The more meaningful long-term question is: Is it willing to embrace innovation? Or will it adopt the same conservative approach that stunted the growth of microfinance, mortgages, and bond market?  As a regulator, its attitude is conservative and ultimately pernicious — an attitude best summarized by the Egyptian proverb that loosely translates as “uninclined to show mercy, or even let God’s mercy prevail.”

The CBE’s conservatism is an outgrowth of having to clean up the fallout from the pyramid schemes of the late 1980s and the non-performing loan crisis of the 1990s, but these things are not unique to Egypt. Financial crises are as old as banking itself. Innovation doesn’t cause them, nor does conservatism completely prevent them.  

The opportunities missed by the CBE’s anti-innovation stance are immense: 90% of the population has no access to formal credit, the government misses out on tax receipts and even the CBE’s inflation and employment targeting mission is hampered when monetary policy transmission is so poor.

But perhaps the greatest missed opportunity is subsidy reform. Replacing Egypt’s endemic energy subsidy program with a direct cash subsidy can only be done at scale if underpinned by an innovative mobile money system. The positive fiscal, developmental and redistributive effects of such a move are difficult to overstate.

The truth is, we are already behind. A few weeks ago, in Kenya, a senior banker described a friend of his to me as “one of those stereotypical fin tech entrepreneurs up on Ngong road.”   The finance technology industry in Kenya is so advanced and thriving that fin tech entrepreneurs are now a stereotype. This is not surprising in a country in which the gross value of transactions through mobile phones is equal to 87% of GDP.

For years the CBE has chosen stability over innovation and progress. The stability this has brought is only temporary, and the long-term effects of backwardness are much more permanent. It is time for change.

An economist and a private equity professional, Hassan Massoud is a partner at elmenus.com.

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