Access to Finance and Economic Growth in Egypt: A Study Led By SAHAR NASR docx

Financial market imperfections—such s information and transactions costs—are likely to be especially binding on the talented poor and the micro and small enterprises, who lack collater

Access to Finance and Economic Growth

Middle East and North African Region

A Study Led By SAHAR NASR

This publication provides a comprehensive and informative analysis of a key policy issue facing Egypt

and other developing countries-how to enhance appropriate access to finance in support of sustained

high economic growth and improved income distribution The detailed and elegant evaluations of the

key segments of the financial sector are supplemented by a holistic discussion that draws out the main

interactions, including the linkages to institutional reforms The timely publication will be interest to a

large number of policy makers, academics, development practitioners and financial market participants.”

Dr Mohamed A El-Erian, President and CEO of the Harvard Management Company, member of

the faculty of the Harvard Business School, and Deputy Treasurer of Harvard University

Broadening the reach of the financial sector is the key to invigorating both economy and society If

more small businesses can get access to the credit and other financial services they need to turn

initiative into employment and profitability, and if low income households can gain the economic security

offered by an account at an intermediary, economic growth and social welfare will both be enhanced

This report takes a close look at the Egyptian financial system to see how outreach and access can be

improved It is firmly based on recently collected statistics and it provides a comprehensive analysis with

recommendations Recent government initiatives have already begun to transform the Egyptian financial

system Access to Finance and Growth in Egypt points the way to future success in lifting the system to

the next level.”

Dr Patrick Honohan, Senior Advisor, World Bank; and Professor of International Financial

Economics and Development, Trinity College Dublin

Financial exclusion is likely to act as a “brake” on development as it retards economic growth and

increases poverty and inequality However, the access dimension of financial development has

often been overlooked, mostly because of serious data gaps on who has access to which financial services

Hence, empirical evidence that links broader access to financial services to outcomes has been very

limited, providing at best tentative guidance for public policy initiatives in this area However, without

inclusive financial systems, poor individuals and small enterprises need to rely on their personal wealth

or internal resources to invest in their education, become entrepreneurs or take advantage of promising

growth opportunities Financial market imperfections—such s information and transactions costs—are

likely to be especially binding on the talented poor and the micro and small enterprises, who lack

collateral and credit histories.”

Asli Demirguc-Kunt, Senior Research Manager, Finance and Private Sector Development,

Development Research Group (DECRG), World Bank

For Egypt, access to finance can radically transform peoples’ lives, promote entrepreneurship,

help bridge the urban-rural income divide, alleviate poverty and improve individuals’ lifetime

economic and social prospects by integrating them into the market economy In short, improved access

to finance can be an engine of growth and structural transformation, if supported by other policies that

reduce barriers to competition, lower the cost of doing business and create incentives for moving out of

the ‘informal sector’ For Egypt, where fewer than seven percent of households have a bank account,

investments and policies that create and improve access to finance and its infrastructure, can break

down economic and social barriers to economic growth and development This well-researched report is

an excellent guide and provides a practical tool-kit for economic and financial policy makers, banks and

financial institutions seeking to improve Egypt’s financial infrastructure and access to finance.”

Dr Nasser Saidi, Chief Economist

Dubai International Financial Centre (DIFC)

“

“

“

“

Access to Finance and Economic Growth

in Egypt

Access to Finance and Economic Growth

in Egypt Middle East and North African Region

A Study Led By SAHAR NASR

Abbreviations and Acronyms viii

B Factors behind Weaknesses in Supply of Banking Services 28

III Sources for Financial Services: Non-bank Financial Services 55

B Information Infrastructure–Credit Registry, Credit Bureau and Other Sources 86

A Enhancing the Role of the Banking Sector in Financial Intermediation 95

B Expanding the Postal System and Microfinance Institutions 101

C Promoting Capital Markets in the Access Agenda 105

D Contractual Savings Industry Potentials for Growth 107

F Increasing the Financial Leasing Industry’s Contributions to Access 115

Annex 1: Indicators For Assessing The Soundness And Performance 130

Of The Banking System

Annex 2: Indicators For Assessing The Capital Market 135

Annex 3: Indicators For Assessing The Insurance And Contractual Savings Sector 136

Contents

Table 1.1: Main Macroeconomic Indicators in Egypt (2001-2006) 7

Table 1.3: Various Sources of Finance in Egypt, MENA, and the World 15 Table 1.4: Household Use of Financial Services by Education Level in Egypt 17 Table 1.5: Use of Finance by Employment Status of Head of Household in Egypt 18 Table 2.1: Frequency Distribution of Private Sector Credit in Egypt 25 Table 2.2: Share of Savings Accounts by Size of Deposits in Banks in Egypt 27 Table 2.3: Local Currency Deposit Interest Rates in Egypt 27 Table 2.4: Number of Credit and Debit Cards Issued in Egypt during 2005 28 Table 2.5: Branching and ATM Presence, Cross-Country Comparisons 30 Table 2.6: Earnings per Employee of Banks in Egypt 37

Table 2.8: Main Reasons for not Lending to SMEs in Egypt 40 Table 2.9: Lending Rates for Local Currency of Banks Operating in Egypt 41 Table 3.1: Compound Annual Growth Rate by Sub-Sector in Egypt 62 Table 3.2: Statutory Investment Limits—Life Insurers in Egypt 63

Table 3.4: Insurance Investment Allocation in Egypt 65 Table 3.5: Private Pension Investment Allocation in Egypt 66 Table 3.6: Investment Approach of the Contractual Savings Industry 66 Table 4.1: History of Public Credit Registry Database in Egypt 86 Table 4.2: Negative Databases of CBE Credit Registry 87

Figures

Figure 1.1: Current versus Desirable Situation of Financial System 2 Figure 1.2: M2-to-GDP in Selected Countries across the World 8 Figure 1.3: Private Sector Credit-to-GDP in Selected Emerging Economies 9 Figure 1.4: Investment Climate Constraints in Egypt as Perceived by Businesses 15 Figure 1.5: Percentage of Firms Currently with a Loan from

a Financial Institution in Egypt 16 Figure 1.6: Enterprises’ Access to Finance in Egypt and Selected MENA Countries 16 Figure 1.7: Households’ Share in Access to Financial Services by

Educational Attainment in Egypt 18

Figure 2.3: Treasury Bills-to-Total Assets in Egypt 24 Figure 2.4: Government Sector Loans-to-Total Loans in Egypt 25 Figure 2.5: State-Owned Enterprises Loans-to-Total Loans in Egypt 25 Figure 2.6: Credit Extended to Private Sector in Egypt 26 Figure 2.7: State-Owned Banks’ Share of the Banking System Total Assets in Egypt 29 Figure 2.8: Urban and Rural Branch Density by Bank Type in Egypt 31 Figure 2.9: Equity-to-Assets Ratio of Banks in Egypt 33 Figure 2.10: Distribution of Staff in the Egyptian Banking System 38

Figure 2.13: Collateral Requirements as a Percent of Loan Values 41 Figure 2.14: Marginal Effects of Branching and Education

on Access to Financial Services in Egypt 45

Figure 3.1: Equity Finance and Corporate Bonds as Sources of

Investment Funding in Selected Emerging Economies 56

Figure 3.2: Assessment of Enforcement in Egypt’s Capital Markets 60

Figure 3.3: State-Owned Insurers’ Share of Insurance Assets in Egypt 63

Figure 3.4: Funds under Management: Egypt and OECD 65

Figure 3.5: Developments in Mortgage Loans in Egypt 71

Figure 3.6: Volume and Number of Leasing Contracts in Egypt 74

Figure 4.1: Legal Rights of Creditors in Egypt and Other Countries 82

Figure 4.2: Cost to Create Collateral in Egypt and Other Countries 83

Figure 4.3: Bankruptcy Costs and Time in Egypt, MENA Region and OECD 84

Figure 4.4: Dominance of Collateral-Based Lending in Egypt 85

Figure 5.1: Funds Build Up Under Five Percent Mandatory Pillar Option 111

Boxes

Box 1.1: Access to Finance as an Obstacle to Growth 5

Box 1.2: Rationales for the Privatization of Banks 12

Box 2.3: Bank Performance Analysis by Size and Ownership 35

Box 2.4: Weaknesses in Corporate Governance in Egyptian State-Owned Banks 42

Box 2.5: The Relative Importance of Demand and Supply Factors in Explaining Access 43

Box 2.6: State-Owned Banks Actively Involved in Microfinance in Egypt 46

Box 2.7: NGOs are Key Players in Microfinance in Egypt 47

Box 3.1: Major Insurance and Pensions Investors in Egypt 67

Box 3.2: The Government of Egypt’s Housing Finance Program for the Poor 69

Box 4.1: Current Status of the Private Credit Bureau in Egypt 88

Box 4.2: The Importance of Good Financial Reporting for Firm Financing 89

Box 5.1: Lessons on Bank Restructuring from Other Countries 96

Box 5.3: Lessons from Successful Postal Financial Systems:

Case Studies from Brazil and China 102

Box 5.4: International Evidence on Institutional Policies to Enhance Access 104

ABBREVIATIONS AND ACRONYMS

ABS Asset-Backed Securities

AIM Alternative Investment Market

ALM Asset and Liability Management

AML/CTF Anti Money Laundering

and Combating Terrorism Financing

ATM Automatic Teller Machines

AUM Assets Under Management

BRU Bank Restructuring Unit

CAGR Compound Annual Growth Rate

CAPMAS Central Agency for Public Mobilization

and Statistics

CASE Cairo and Alexandria Stock Exchanges

CBE Central Bank of Egypt

CCMAU Crown Company Monitoring Advisory Unit

CFD Corporate Finance Division

CGAP Consultative Group to Assist the Poorest

CGC Credit Guarantee Company

CIB Commercial International Bank

CIBOR Cairo Interbank Offer Rate

CIS Cooperative Insurance Society for

Small Enterprises

CMA Capital Market Authority

DB Defined Benefits

DC Defined Contribution

EAB Egyptian American Bank

EAS Egyptian Accounting Standards

EEGC Egyptian Export Guarantee Company

EFG Egyptian Financial Group

EISA Egyptian Insurance Supervisory Authority

EMRC Egyptian Mortgage Refinance Company

ESDF Egyptian Swiss Development Fund

FCI Factors Chain International

FIRST Financial Sector Strengthening Initiative

FSAP Financial Sector Assessment Program

FSS Financial Self-Sufficiency

GAFI General Authority for Free Zones and

Investment

GATS General Agreement on Trade in Services

GCC Gulf Cooperation Council

GDP Gross Domestic Product

GDR Global Depository Receipt

GEM Gender Entrepreneurship Markets

GSF Guarantee and Subsidy Fund

HH Household

IAS International Accounting Standards

ICA Investment Climate Assessment

ICS Investment Climate Survey

ICT Information and Communications

Technologies

IFG International Factoring Group

IFRS International Financial Reporting Standards IFI Islamic Financial Institutions

IFS Islamic Financial Services IIC Islamic Investment Companies IPOs Initial Public Offerings KOSDAQ Korea Securities Dealers Automated

Quotation

LE Egyptian Pound M2 Broad Money MCSD Misr Clearing, Settlement and Central

Depository Company MENA Middle East and North Africa MFA Mortgage Finance Authority MFIs Microfinance Institutions MIB Misr International Bank MIX Microfinance Information Exchange MTPL Mandatory Insurance

NBFI Non-bank Financial institutions NBD National Bank for Development NBE National Bank of Egypt NGO Non-governmental organization NIB National Investment Bank NPL Non-performing loans NPS National Payments System NSGB National Societe Generale Bank OECD Organization for Economic Co-operation

and Development OTC Over the counter PBDAC Principal Bank for Development and

Agricultural Credit PML Primary mortgage lending PSB Postal Savings Bureau R&D Research and development RELC (Non-bank) real estate lending companies Repo Repurchase operations

ROA Return on assets ROE Return on equity ROSC-AA Report on Observance of Standards and

Codes Accounting and Auditing RTGS Real-time gross settlement SEDO Small Enterprise Development Organization SFD Social Fund for Development

SIF Social Insurance Fund SME Small and Medium Enterprise SOE State-Owned Enterprises SRC Social Research Center SRO Self-regulatory organization TSX Toronto Stock Exchange US$ U.S Dollars

WBES World Business Environment Survey WFE World Federation of Exchanges

This report was initiated at the request of the Egyptian Government

to get a better understanding of why, as found by the Investment

Climate Assessment, only 17.4 percent of Egyptian firms operate in

the formal credit market The report draws on surveys of firms, banks

and households to determine why so few firms—and households—use

formal financial markets for their investment and saving needs, and

why banks and other financial institutions are reluctant to extend

credit, even in conditions of high liquidity

The key findings are that: (i) significant public ownership of real

and financial assets in Egypt has discouraged competition and the

development of deep and well-regulated financial systems, including

non-bank sources of financial services; (ii) a large fiscal deficit has

encouraged financial institutions, particularly publicly owned ones,

to invest predominantly in risk and tax free government securities;

banks, and publicly owned ones in particular, have little incentive

to lend to other than state-owned enterprises and large private

firms; and (iii) smaller private and foreign banks are more active in

expanding access to financial services by households and small and

medium enterprises (SMEs) due to their capacity to better assess risk

and capture opportunities

Improving access to financial services will require continuing the

shift in the role of the government in the sector—away from asset

ownership and towards creating an enabling environment for private

(including foreign) financial service providers to innovate in providing

services to firms and households Here, as the report indicates,

the government has a critical role to play in ensuring a stable

macroeconomic environment, lower deficit and public borrowing, good

supervisory oversight, and adequate institutional infrastructure A

number of the issues raised in this report are already being addressed

by the government under the financial sector reform program initiated

in November 2004

The objective of this report is help the government with the design

of the second generation of financial reforms aimed at increasing the

role of the private sector in financial services provision, particularly

to SMEs and households, while strengthening risk management in

Social and Economic Development Group Middle East and North Africa Region

The World Bank

Emmanuel Mbi

Director Egypt, Yemen and Djibouti Country Department The World Bank

In September 2004, the Financial Sector Reform Program was launched

and endorsed by the Government of Egypt at the highest political level The

five pillars of the program are reforming the banking sector, restructuring

the insurance sector, deepening the capital markets, developing a

well-functioning mortgage market, and activating other non-bank financial

institutions and services The program aims at improving the soundness

of the financial sector and promoting an enabling environment for an

efficient, competitive and agile financial system that serves Egypt’s

development and growth objectives

The Egyptian government and the Central Bank of Egypt have been

keen on the effective implementation of this program, and significant

progress has already been made Important achievements include, the turn

around of the structure of the banking sector and the foreign exchange

market as well as establishing a credible monetary policy framework,

in addition to consolidating the banking sector, divestiture of the

state-owned banks’ shares in the joint-venture banks, privatizing one of the

four largest public banks, pursuing the restructuring of the remaining

public financial intermediaries and building the supervisory capacity of

the Central Bank

Meanwhile, major reforms aiming at improving the regulatory framework

and enhancing the soundness and effectiveness in financial intermediation

of non-bank financial services, have been undertaken These reforms have

contributed to the deepening of the capital market and enhancing its efficiency

and liquidity, restructuring and liberalizing the insurance sector, developing

the mortgage market, and reviving the role of other non-bank financial

services and instruments, including leasing, factoring and securitization This

comprehensive reform program has been underpinned by capacity building of

the supervisory authorities of all non-bank financial institutions

The progress and pace of the Egyptian Financial Sector Reform Program

have been commended at home and abroad However, we are aware that

we still have some way to go to fully reform the sector and address its main

challenges; one of which is ensuring better access to financial services which

is imperative to economic growth and development Improving access to

finance allows businesses, especially small and medium enterprises, to

capitalize on their growth potential, operate on a larger scale and turn

initiatives and ideas into employment opportunities Moreover better

and wider access to financial services by households at all income levels

positively impacts their economic and social welfare

The Government of Egypt will continue to foster efforts on facilitating

The Access to Finance and Growth in Egypt is a joint product of the

Government of Egypt and the World Bank The study was initiated by

the Minister of Investment, H.E Dr Mahmoud Mohieldin, as a follow

up to the Investment Climate Assessment, which had identified access

to finance as a main constraint to private-sector development; and H.E

Dr Farouk El-Okda, Governor of the Central Bank of Egypt (CBE)

This study was carried out under the joint leadership of Emmanuel

Mbi, Country Director, and Zoubida Allaoua, Sector Manager in the

Middle East and North Africa Region (MENA) of the World Bank

The study was led by Sahar Nasr, Senior Financial Economist in

MENA, based on input from Stijn Claessens, Senior Adviser; Rodney

Lester, Program Director, Financial Markets for Social Safety Net;

David Scott, Adviser; Lọc Chiquier, Head, Housing Finance Practice;

JaeHoon Yoo, Senior Securities Market Specialist; Robert J Cull,

Senior Economist; Luc Laeven, Senior Financial Economist from

the Finance and Private Sector Development Vice Presidency; and

Mohamed Yehia Abd El Karim, Financial Management Specialist; as

well as Heba El Laithy, Senior Consultant; Bahaa Ali Eldin, Senior

Legal Consultant; and Esen Ulgenerek, Consultant

This access to finance study is based on the findings of five main

surveys: the Investment Climate Survey (ICS) of 1,052 enterprises

from the manufacturing sector that was carried out between

October 7 and December 10, 2004 using the World Bank standard

methodology; the ICS recall questionnaire of 300 enterprises that was

carried out in June 2005; the individual banks survey undertaken

between February and March 2006, supported by CBE, based on the

core questionnaire provided by Asli Demirguc-Kunt, Senior Research

Manager at the World Bank, to which 35 out of 45 banks operating

in Egypt responded; the insurance survey, carried out under the

leadership of the Ministry of Investment in March 2006 and to

which 20 out of 21 insurance companies responded; and the National

Household and Income Survey for the fiscal year 2005, which covered

48,000 households in 1,500 communities The first three surveys were

carried out by the Social Research Center (SRC) of the American

University in Cairo, under the leadership of Dr Hoda Rashad, and

Acknowledgments

coordinated by Dr Ramadan Hamed; the fifth was undertaken bythe Central Agency for Public Mobilization and Statistics (CAPMAS) under the Ministry of State for Economic Development.

The development of the report entailed discussions with key policy makers and government counterparts, including, Tarek Amer, Deputy Governor; Tarek Kandil, Sub-Governor; Lobna Hilal, Assistant Sub-Governor; Mona Bassiouni, Assistant Sub-Governor; and Gamal Nigm, Assistant Sub-Governor Valuable comments were received from Maged Shawki, Chairman of Cairo and Alexandria Stock Exchange (CASE); Hany Sarie El Din, Chairman of Capital Market Authority (CMA); Mahmoud Abdullah, Chairman of Egyptian Insurance Holding Company; Osama Saleh, Chairman of Mortgage Finance Authority (MFA); Ashraf El Kadi, Deputy Chairman of MFA; and Ziad Bahaa El Din, Chairman of General Authority for Investment and Free Zones (GAFI); as well as Abdel Hamid Ibrahim, Senior Advisor; Mona Zobaa, Advisor; and Ahmed Rostom, Economist

in the Ministry of Investment

Strong support was provided all along for the missions and various consultations during the preparation of this work The team would like to thank in particular the Ministry of State for Economic Development; Ministry of Finance; Ministry of Foreign Trade and Industry; Social Fund for Development (SFD); Economic Research Forum (ERF); EFG Hermes; Syndicate of Commerce; Federation of Egyptian Industries; Egyptian Center for Economic Studies (ECES); Egyptian Businessmen Association; Institute of Banking and Finance; Misr Clearing, Settlement and Depository Company (MCSD); Egyptian Postal Authority; and Egyptian Society of Accountants and Auditors Feedback was also provided by the private-sector community in a roundtable organized by the American Chamber

of Commerce in Egypt coordinated by Hisham Fahmy, Executive Director Partners who are actively involved in the financial sector

in Egypt, including USAID, European Commission (EU), and United Nations Development Program (UNDP), have made significantcontribution to this study

Thoughtful comments from several World Bank colleagues and external reviewers are reflected in this study The study benefitedimmensely from intensive reviews by Patrick Honohan, Senior Adviser;

in addition to external reviewers Mohamed El Erian, President and CEO of Harvard Management Company; and Nasser Saidi, Director

of Hawkamah Institute for Corporate Governance Comments and contributions from several World Bank colleagues on an earlier draft have also been provided by Noritaka Akamatsu, Roberto Rocha and Ahmed Galal The study also benefited from comments received fromGaiv Tata, S Ramachandran, and Omer Karasapan Valuable support was received from Marilou Jane D Uy World Bank, International Finance Corporation (IFC) and FIRST Initiative staff contributed to this study, including notably Bikki Randhawa; Carmen Niethammer; Isabella Segni; Jim Aziz, Jose Antonio Garcia Luna; Massimo

Cirasino; Murat Sultanov; Peer Stein; Peter Sheerin; Robert Keppler;

and Thomas Jacobs Laila Abdel Kader provided extensive support

with document preparation Amira Fouad Zaky, Steve W Wan Yan

Lun, and Sydnella E Kpundeh provided invaluable logistical support

throughout the process Editorial support was provided by Laura

Goodin and print production including book design was undertaken

by Magdy Nassif

Early versions of this study have been presented and discussed at

seminars and workshops in Cairo and Washington in which different

stakeholders participated, including bank and non-bank financial

institutions, private sector, civil society, donor agencies, academia,

government officials, and the supervisory and regulatory bodies

Valuable comments received from these participants are reflected in

this final version We would like to take this opportunity to thank all

the people in government, financial, donor, and academic communities

who have provided their time, thoughts, and contributions to the

team and to the study

Access to finance is important for growth and economic development.

Having an efficient financial system that can deliver essential services

can make a huge contribution to a country’s economic development

Greater financial development increases growth, reduces economic

volatility, creates job opportunities and improves income distribution,

as has been established by a large empirical literature A

well-functioning financial market plays a critical role in channeling funds

to their most productive uses, and allocates risks to those who can

best bear them

Getting the financial systems of developing countries to function

more effectively in providing the full range of financial services is

a task that will be well rewarded with economic growth Where

macroeconomic environment is sound, the efficient and prudent

allocations of resources by the financial system makes it crucial for

increasing productivity, boosting economic development, enhancing

equality of opportunity, and reducing poverty Empirical evidence

has shown that the financial systems in advanced economies

have contributed in an important way to the prosperity of those

economies

A well developed financial market comprise spectrum of

well-functioning banks, and non-bank financial institutions Banks

provide deposit and payments services, allocate resources, and

monitor operations of firms Equity markets provide financial

leverage and ensure efficient allocation of resources Well-developed

capital markets force banks to pay more attention to smaller firms

and households Active domestic bond markets provide firms with

long-term domestic currency finance and ease credit crunch during

periods of bank stress Housing finance is important for households

and provides an important asset for entrepreneurs Successful

leasing, factoring, and venture-capital markets provide financing and

enhance an economy’s productivity

The potential for financial development and growth in Egypt is

large as macro economic policies and overall business environment

fundamentals are increasingly supportive This is evident in

accelerating economic growth, increased market confidence, strong

capital inflows, stability in the foreign exchange market, significant

increase in international reserves, and fall in inflation The impact

Executive Summary

Greater financial development increases growth, reduces economic volatility and improves income distribution

The potential for financial development

in Egypt is large

as macro economic policies and overall business environment fundamentals are increasingly supportive

of the broad range of structural reforms, particularly those affecting the investment climate, initiated by the government appointed in July 2004 is being reflected in the significant improvement in theinvestors’ perception of the business environment

A cornerstone of the government’s comprehensive reform program

is the Financial Sector Reform Program, endorsed in September

2004 The program aims at improving the soundness of the financialsector and fostering an enabling environment for the emergence of an efficient, increasingly private-led financial system that serves Egypt’sdevelopment and growth objectives The program is underpinned by significant improvements in the legal, regulatory, and supervisoryframework across the bank and non-bank financial institutions, withthe aim of enhancing competition, improving financial intermediation,fostering more efficient mobilization of savings, and ensuring systemicsoundness An integral component of the strategy is to promote the quality of information and market discipline by upgrading financialinstitutions’ accounting, auditing and reporting to international standards

Significant progress has been made in the implementation ofthese financial sector reforms Achievements include consolidatingthe banking sector, divesting the state-owned banks’ shares in the joint-venture banks, privatizing one state-owned bank, pursuing the restructuring of the remaining three state-owned commercial banks, and building the supervisory capacity at the central bank For non-bank financial institutions, various reforms have been undertaken tofurther deepen the capital market, restructure the insurance sector, develop a well-functioning mortgage market, activate financial leasing,and factoring However, such progress has not yet been reflected inimproved performance and enhanced financial intermediation Various financial indicators put the Egyptian financial sector

at a moderate level in financial intermediation compared to otherdeveloping countries Although mobilization of savings in Egypt is high

by international standards, the banking sector is not intermediating efficiently Most savings are channeled through the financial system asbank deposits, where the deposit-to-GDP ratio of 100 percent is much higher than the world average and substantially higher than many developed economies However, little of it is channeled to the real, productive private sector and is mainly used to finance governmentdeficits or as loans extended to state-owned enterprises

Private-sector credit to GDP in Egypt is modest compared to other developing economies Private credit as a share of total credit has been declining, to reach 66 percent in 2006, compared to 70 percent

in 2003 Importantly, the distribution of bank financing is uneven,with most loans going to large and well-established enterprises Consequently, family-owned firms and small and medium enterprises(SMEs)—the majority of firms in Egypt—rely heavily on the informalmarket

Formal financing, whether from banks or non-bank financialinstitutions, plays a limited role in financing enterprises, especially

This is largely due

to the broad range of

however, this has not

yet been translated to

better performance and

SMEs More than 37 percent of the firms consider access and cost of

finance major obstacles to growth The large majority of Egyptian

manufacturers rely exclusively on their own funds; only 17.4 percent

have access to finance from the financial sector This is especially

striking for small firms—only 13 percent have access to finance, as

opposed to 36 percent for large firms While the average for Egypt is

comparable to the other countries in the Middle East and North Africa

(MENA), it is significantly below that in other developing countries

Moreover, the financial sector plays a limited role in financing

new investments On average, only 7 percent of new investments

and working capital in Egypt is financed externally through the

banking sector, compared to more than 13 percent in MENA region,

and 18 percent in the rest of the world Banks often prefer to extend

credit to large corporate clients and connected individuals that are

considered less risky, while start-up companies remain financially

constrained While the capital market can play an important role

in financing growth and development, it only financed 3.8 percent

of new investments in Egypt The dependence on internal finance

indicates that firms in Egypt are unable to take advantage of growth

opportunities, with negative ramifications for overall economic and

employment growth

Incentives for small firms and households to use deposits and

other financial services are poor Minimum required deposit amounts

are too high to enable the poorer segments of the population to access

the banking system and tend to discourage the unbanked population

to save through formal channels The lack of deposit mobilization

from small savers is not due to financial repression, as interest rates

on deposits are relatively high Although state-owned banks have

a comparative advantage in attracting small depositors, with their

huge branch network in governorates and villages, they have instead

focused on large depositors, and extend very limited financial services

to the relatively disadvantaged segments of society Recently, however,

banks have been trying to catch up and cater to small depositors for

all types of financial services

Few Egyptian households use any kind of formal financial services

Savings instruments are more common than credit, and the most

common is postal savings, roughly twice as prevalent as bank savings

among the illiterate and those who can read and write Usage of

financial services increases substantially with the level of education

of the head of the household However, almost no households have

formal credit or capital-market investments, where less than one

percent of households surveyed had a formal loan

Sources For Financial Services: The Banking Sector

Financial intermediation by the banking system that accounts for

more than 60 percent of the financial system’s assets is weak by

international standards While savings are high and banks collect

Formal financing, whether from banks

or non-bank financial institutions, plays

a limited role in financing enterprises, especially SMEs

this is especially striking for start-up enterprises that rely mainly on internal funds and retained earnings

Incentives for small firms and households

to use deposits and other financial services are poor

However, usage of financial services increases substantially with the level of education of the head

of the household

large deposits, amounting to about 100 percent of GDP, they actually lend little of these deposits The loan-to-deposits ratio has been declining over the last few years to reach only 58 percent in June

2006, well below the world average of 86 percent, and much less than the level of intermediation in many developed economies, where typically credit exceeds deposits

Only a small portion of the funds that are mobilized are lent to the productive sector, and even less to the private sector Credit to the private sector was at 54 percent of GDP in 2006, similar to country comparators, yet half the OECD average Credit to the private sector has sharply decreased over the past few years, as private credit as a share of total credit has been declining to reach 66 percent in 2006, compared to 70 percent in 2003 Furthermore, much of the lending extended to the private sector goes to a few large firms, with mostfirms, especially SMEs, receiving little financing

Most of the funds that are mobilized finance the budget deficit and thepublic sector Banks, particularly state-owned banks, are increasingly investing in treasury bills and government bonds, holding about 91 percent and 70 percent of the outstanding respectively as of June 2006 This reflects banks’ inefficiency in identifying profitable projects, as well as their cautious investment policies Investing in treasury bills,

in addition to being risk-free, is tax-exempted Direct lending to the public sector–both the government and state-owned enterprises (SOEs)–has also increased in recent years Lending to SOEs remains high for state-owned banks compared to private banks

Access to Bank Financial Services

Relative to Egypt’s total population, banks have few outlets for basic banking services Egypt has fewer bank branches and automatic teller machines (ATMs) per capita than countries with similar per-capita income Relative to the developing world, Egypt’s branch density is low, and its ATM coverage is less than one-seventh that of the typical developing country In general, banks tend to concentrate on the urban population State-owned banks have the most balanced branch network overall, though their presence is still greater in urban than

in rural areas State-owned specialized banks are the only banks for which rural branch density is higher than urban Private and joint-venture banks have much less rural coverage, while foreign banks have little physical presence in either urban or rural areas

State-owned banks lend mainly to large corporations, while private, joint venture, and specialized state-owned banks, followed

by foreign banks, are more active in lending to SMEs Foreign banks also reach out more than other types of banks to retail clients, possibly taking advantage of their own superior credit-scoring skills Large corporate-sector loans are as large as 70 percent of total loans for many banks, with SME lending accounting for only 20 percent, and retail lending only 10 percent of total loans The distribution of loans

is quite concentrated in Egypt, leaving the banking system suffering from a high concentration of credit risk and lack of diversification

Relative to Egypt’s total

population, banks have

few outlets for basic

banking services

Factors Behind Weaknesses in Supply of Banking Services

The poor quality of financial intermediation is reflected in high

transaction costs, large non-performing loans, and limited access for

small firms and households to financial services This could be partially

attributed to the dominance of state-owned banks, compounded by

the ongoing process of institutional and operational restructuring, as

well as the new and relatively untested regulatory and supervisory

framework

The banking sector is dominated by state-owned banks that lag in

efficiency and generally in performance in financial intermediation

compared to their private counterparts State-owned banks are

undercapitalized, and suffer from poor asset quality and high levels of

non-performing loans There are no incentives for them to proactively

identify problem loans, maximize profits, or even minimize losses, as

reflected in their relatively low profit margins, high operating costs,

and inadequate risk-management systems

Importantly for access to financial services, state-owned banks

are also slow to modernize and innovate, and the volume and scope

of products and services they offer have been limited Although

new products are being introduced, most loan products are quite

basic, generally straight lending with fixed interest rates Fees and

commissions and treasury earnings are not significant sources of

revenues, primarily because of a lack of product diversification Banks

are not offering hedging, forwards, factoring, or export receivables,

discounting under letters of credits, and structured investment

banking products The recent increase in ATMs and credit/debit

cards as well as retail lending suggest, however, that banks will see

an increase in income from fees and commissions in the future

Skills to assess credit risk are generally weak, and the credit

decision is centralized, especially in state-owned banks A few banks

have internal exposure limits by sector or types of borrowers, and

require periodic financial statements from borrowers A very limited

number of banks conduct independent annual asset risk reviews,

market and sector analysis sufficient to establish a solid strategy

for growth or to target new markets Most banks are characterized

by lack of standard products, poorly functioning asset-liability

management, and internal pricing mechanisms The restructuring

of non-performing assets in the state-owned banks has distracted

management from focusing on extending credit

Another sign of a poorly functioning credit market is that lending

terms are unfavorable, with very high collateral requirements Usually

banks resort to over-collateralizing when there are problems associated

with foreclosure and loan-recovery procedures Furthermore, since

banks have been operating under directed lending for some years,

they are not trained to base their credit decision on cash-flows, and

thus require more collateral Slow response times to set up credit

lines–excluding the setting up of the collateral requirements and

registering the collateral–suggest low internal credit-approval limits,

lack of competition, and overall inefficiency

State-owned banks, that dominate the banking system, lag in efficiency and in financial intermediation compared to their private counterparts

they are also slow

to modernize and innovate, and the volume and scope of products and services they offer have been limited

Lending terms are unfavorable with very high collateral requirements, and slow response times to set up credit lines

Skills to assess credit risk are generally weak, and the credit decision is centralized

While interest rates follow the government borrowing costs as a benchmark, there is no proper yield curve to help price risks in the longer market The lack of foreign-currency hedging instruments leads banks to being overly cautious and charging high margins

in foreign-currency lending Spreads between lending and deposit interest rates are in general high, up to 10 percentage points These high spreads reflect the need for high provisioning, andinefficiency due to overstaffing The high spreads also show a supply-driven lending market, where banks take advantage of the lack of competition or collude in keeping spreads high Only in lending to the large corporations do banks give evidence of much competition Moreover bigger banks (as measured by total operating income) and more highly capitalized banks extend relatively more loans This suggests that there are economies of scale, arguing for increased consolidation of the banking sector in Egypt At the same time, banks with relatively more deposits—the cheapest source of funding—tend

to extend relatively fewer loans, independent of bank ownership Investigations suggest that, not having to compete for deposits creates incentives for easy forms of financial intermediation, such as lending

to the government and large corporations This analysis suggests that large private and foreign banks are best able to increase lending

to the private sector in a sustainable manner in Egypt

Overall, the banking sector reform program launched in late 2004 and changes in the business environment have rejuvenated banks The institutional and operational restructuring of the state-owned commercial banks will further improve their efficiency and profitabilityover time Banks are improving credit policies and procedures, while provisioning for past problem loans; upgrading their banking services; widening the range of lending products available to the non-corporate sector; and diversifying products as the regulatory framework adjusts

to the new environment The government is also making efforts to address state-owned banks’ non performing loans (NPLs), including

a time-bound scheme with resources from privatization proceeds earmarked for its implementation

The ongoing consolidation of the banking system with the exit of small private and joint-venture banks and the entry of several strong foreign banks is expected to enhance competition in the market Such rapid consolidation will lead to opportunities to exploit economies of scale, lowering the cost of financial intermediation The privatization

of Bank of Alexandria—the fourth largest state-owned bank—in late

2006 is considered a milestone in this comprehensive reform program The progress in the implementation of the banking reform program has been evident in the slight improvements in the banking system performance and capacity to intermediate indicators

and there is not a

proper yield curve to

help price risks in the

longer market

However,

state-owned banks have

recently been subject

Sources For Financial Services:

Non-bank Financial Services

Well-developed non-bank financial institutions can provide external

financing and help improve the risk and maturity profile of

corporations’ external financing Non-bank finance—capital markets,

insurance, contractual savings, mortgage finance, financial leasing,

and factoring can serve as an important source of finance for the

real sector However, to date, these forms of external financing are

relatively underdeveloped in Egypt

Non-bank financial institutions in Egypt face various obstacles,

similar to those impeding efficient intermediation by the banking

system: the still-large role of the state, through ownership as well

as tightly prescribed (investment) regulations; the lack of

well-functioning and efficient means of registering and enforcing property

rights, especially on collateral; and limited and poorly available

information bases on potential clients and borrowers Although there

is progress, further streamlining and more market-based measures

are needed

Capital Markets

Although noteworthy strides have been made, the development of

capital markets in Egypt remains below potential, especially in terms

of primary markets Egyptian firms’ access to long-term capital has

been hampered mainly by an inadequate legal framework, especially

regarding new securities issuance; lack of active domestic financial

investors; and a weak regulatory and supervisory framework

While the secondary capital markets are active, new capital market

issuance–both bond and equity–have been very limited The primary

markets are much smaller than those of high-performing emerging

markets Little external financing has been made available for firms

from both equity or bond markets, and what is provided mostly goes to

the largest firms As elsewhere, stock exchanges mainly target large,

blue-chip companies; because of their size, low creditworthiness,

and limited transparency, SMEs have more difficulties in accessing

capital markets

The securities market as a source of investment financing is limited

in Egypt The private sector has made few corporate bond and public

equity offerings in recent years While there have been more equity

issues than corporate bonds, many equity issues were public offerings

or sales of government shares in large state-owned companies, which

do not add to capital formation Funds raised through corporate bonds

were even less compared to equity financing The corporate bond

market is nascent and largely dominated by commercial banks, while

access to international capital markets is limited to large enterprises

and financial firms No Eurobond has been issued by an Egyptian

company to date

Non-bank financial institutions are under developed, and face various obstacles similar to those impeding effective intermediation by the banking system

The developments of capital markets in Egypt remains below potential especially

in terms of primary markets

The corporate bond market is nascent and largely dominated by commercial banks, while access to international capital markets is limited to large enterprises and financial firms

Insurance and Contractual Savings

Egypt’s insurance and contractual savings sector is small compared

to the size of its economy Since growth of contractual savings is typically linked to GDP per capita, with some low-income countries experiencing threshold effects, growth will take time Still, Although penetration is higher than in other countries of the region, insurance and pension products have yet to gain broad public appeal Only a small percentage of the working population participates in retirement plans Furthermore, the sector does not yet do a good job of channeling resources to the private sector

The insurance sector is largely publicly owned; however, more foreign insurers are entering the market The four largest insurers (including one reinsurance company) are majority state-owned, accounting for about 70 percent of premiums The new foreign entrants

in the insurance sector (particularly life insurers) are growing faster than both the domestic insurers and voluntary pension funds While foreign life insurers have been able to make inroads, the largest insurers seem determined to maintain market share The non-life sector is hardly developing, and non-life reserves are very limited.Institutional savings–life insurance and other forms of long-term savings–remain limited compared to their potential for financing thereal sector The structure of the more developed non-life insurance market has changed marginally over the past decade, and competition tends to be based on price rather than product innovation Importantly for access to financialservices,and despite currentregulationsallowinginsurance companies a limited degree of investment flexibility,most reserves continue to be invested in government bonds or bank deposits This underlines the need to develop a modern corporate-finance culture with up-to-date institutional investment skills At thesame time, capital markets lack products suited to the insurance and contractual savings markets’ liability structures

Dominated by state-ownership, the insurance sector’s investment portfolios have been used for social purposes, to fund state-owned banks and state-owned enterprises and to meet government borrowing requirements Investment in the real sector has been relatively insignificant The insurance sector suffers from a lack of investmentskills, including lack of asset and liability management modeling capacity and limited ability to assess credit and market risks This is exacerbated by a legal and social environment that discourages risk taking and, in the state-owned insurers, a salary structure that makes

it impossible to attract top graduates The regulatory environment also places relatively tight limits on investment allocations, prudent

in the absence of a risk-based supervisory regime and capacity, but limiting access to finance for the real sector

Investment decisions by private pension funds—an essential component of the contractual savings scheme—show even lower intermediation to the real and private sectors than in the insurance sector Private pension funds tend to be managed in-house, encouraging

Egypt’s insurance and

contractual savings

sector is small compared

to the size of its economy

Institutional savings—

life insurance and

other forms of long-term

savings—remain limited

compared to their

potential for financing

the real sector

banks and state-owned

enterprises and to meet

government borrowing

requirements

an overly conservative approach Larger funds have recently begun

to experiment with the use of external investment managers Aside

from insurers and private pension funds, NIB is the major potential

long-term investor in Egypt NIB has generally not invested in the

real or private sectors; its main role has been to intermediate funds

from a public pension system Its investments have been for social

purposes, to fund state-owned banks and the government borrowing

requirement, with negligible investment in the real sector Altogether,

as a consequence of limited development and poor asset allocation,

insurance, pension, and other long-term institutional investors do not

provide much financing to the productive sector

However, in the context of ongoing sector liberalization and more

open entry for foreign companies, the government is undertaking

a major restructuring program—addressing skills misalignment,

underwriting standards, risk management, and asset-investment

policies—to allow state-owned insurance companies to withstand

competition, ensure ongoing technology transfer, and prepare for

privatization Moreover, the success of the new foreign entrants

reflects product innovation, mainly investment-linked life products,

and efficient distribution It is clear that the major institutional

investors are keen on expanding investment opportunities

Mortgage Finance

Several constraints limit households’ access to long-term finance for

home ownership, and the consequent development of a mortgage

market These include limited access to long-term funding for

primary lenders, cumbersome property registration procedures,

inadequate collateral enforcement, lengthy court process, and

untested foreclosure procedures; consequently, interest rates

approximate those for unsecured lending Another key challenge is

the undeveloped regulatory framework for securitization to enhance

the secondary mortgage market

As a result, most commercial banks—state-owned and private—

are extending loans to homebuyers, mostly as part of their retail

activities or their lending to developers, by using collateral other than

mortgage pledges Although most banks are liquid, they are reluctant

to extend mortgage loans, mainly because of maturity mismatches

between short-term deposits and long-term mortgage loans, and lack

of registered titles There are currently few non-bank real estate

lending companies extending mortgage loans

Until a few years ago, only some individuals buying houses could

obtain finance, but not in the form of mortgage loans The most common

finance arrangement was the deferred installment system where the

developer receives a down payment of around 10 to 25 percent of the

purchase price, followed by installments over four to eight years, and

the title is formally transferred when the last installment is paid

Under this system, purchasers pay a significantly higher interest

rate than if they could obtain a loan secured on the property, and

However, in the context

of ongoing sector liberalization and more open entry for foreign companies, the government is undertaking major restructuring of the insurance sector

Mortgage finance is constrained by limited access to long-term funding, cumbersome property registration procedures, inadequate collateral enforcement, lengthy court

process, and untested foreclosure procedures

short maturities require high repayments The system also ties up the funds of developers, who would rather invest into new projects, and can be constrained by an adverse cycle of real estate markets In general, it prevents many from entering the housing market, and is only a second-best to genuine residential mortgage markets.

Over the past few years, the government has made progress

in developing an enabling environment for a modern mortgage market This includes setting the legal foundation and improving collateral enforcement and foreclosure procedures The government has significantly reduced fees for property registration,alleviated bottlenecks in the new urban communities, and launched

residential-a systemresidential-atic title residential-adjudicresidential-ation, survey residential-and registrresidential-ation process

to modernize the property-registration system The legal and institutional framework now also allows private-sector financialinstitutions to securitize mortgages

Another major development has been the incorporation of the Egyptian Mortgage Refinance Company (EMRC), which will enablequalified mortgage lenders to access term refinancing for mortgageloans and better manage the risks of mortgage lending EMRC will also offer banks a safe channel to lend excess funds to other credit institutions The term finance that EMRC will provide to primarymortgage lenders will help them reduce the liquidity risk incurred in providing long-term housing loans The EMRC is expected to improve access through competition in the mortgage market (by creating a funding source of non-depository lenders), promote the development of safe and sound mortgage credit standards, and spur the development

of fixed-income securities markets All these developments will helpshift most of the burden of housing finance from the governmentbudget and develop access to mortgage finance through financialmarkets

Financial Leasing

Financial leasing is comparatively little used in Egypt, and the annual volume of leases is quite small relative to other forms of financialintermediation and economic activity There is a small stock of outstanding leases, and the number of leasing contracts and leasing companies is modest Most leasing companies are controlled by banks

or bank affiliates The government has recently acted to develop thefinancial leasing industry, including exempting leasing companiesfrom stamp duty and removing obligations to limit debt interest to

a maximum of four times their capital; eliminating restrictions on leasing companies lease of assets including land, cars, and tourism buses; and simplifying the contracts-registration process The Leasing Association was revived in 2005 to provide a forum to voice to leasing companies’ concerns and to ensure dissemination of best practice

In spite of these recent reforms, the development of the leasing industry is still hampered by an unsupportive institutional environment One of the major impediments is the difficulty of

Over the past few

years, the government

has made progress in

access term refinancing

for mortgage loans and

better manage the risks

of mortgage lending

Financial leasing is

comparatively little

used, and the annual

volume of leases is quite

small

repossessing assets (due in part to the inadequate enforcement

of ownership rights), as well as delays in the collection of overdue

payments Enforcement of court orders, especially for movable assets,

is a major issue, and the costs associated with repossessions are very

high It is also difficult to sue defaulted clients for breach of contract,

and the time to collect on a dishonored check is between one and five

years Another impediment for the growth of the leasing industry, as

for the financial system at large, is the unavailability of adequate and

reliable credit information The leasing industry is also constrained

by the lack of long-term funding, and its relatively high cost when it

is available Together with poor market conditions, these factors have

reduced leasing companies’ ability to seek clients, especially start-up

enterprises

Factoring

Factoring in Egypt is currently almost non-existent Enterprises

finance their accounts receivables through banks or from their own

sources, increasing their financing requirements Like other

non-bank financial institutions, factoring companies do not have access

to potential clients’ creditworthiness information, and are impeded

by the inefficient legal mechanism for collection of receivables The

government has recently undertaken numerous reforms to foster the

factoring industry, including amending the Executive Regulations of

the Investment Law, setting the main rules and regulations governing

factoring activities; licensing requirements; registration requirements

and procedures; and establishing surveillance that includes financial

adequacy, credit risk protection, disclosure, accounts receivable

bookkeeping, and collection services The amendments also facilitate

the entry of factoring corporations

Access to Microfinance Institutions and Postal System

The demand of household and small firms for microfinance is largely

unmet A conservative estimate suggests that there are at least 2

million micro enterprises in Egypt as of June 2006, accounting for

93.7 percent of establishments While no formal aggregate estimates

are available, it is estimated that the outreach of the microfinance

industry in Egypt covers only about 10 percent of potential borrowers

Microfinance institutions, however, often do not have the necessary

skills and scale The recently endorsed National Strategy for

Microfinance is expected to address the constraints to the development

of the microfinance industry in Egypt

Egypt Post plays a limited role in financial intermediation despite

its huge branch network of more than 3,600 branches, many of them

in remote areas It provides low-cost savings and transaction account

services, supported by a centralized high-speed network linking all

main offices Only 600 are connected via DSL lines, and many do not

offer a full range of financial services To date, Egypt Post cannot

the financial leasing industry is still hampered by

an unsupportive institutional environment

The demand of household and small firms for microfinance

is largely unmet

Egypt Post plays a limited role in financial intermediation despite its huge branch network

Factoring is almost non-existent in Egypt, enterprises finance their accounts receivables through banks or from their own sources

exchange payments directly with other banks, but interoperability between its network and some inter-bank networks is under preparation

INSTITUTIONAL ENVIRONMENT

Egypt does not have an enabling institutional infrastructure for

a sound and efficient financial system However, specific effortshave been exerted to improve the infrastructure and institutional environment for efficient intermediation include improving andstrengthening the legal, regulatory and supervisory framework, information infrastructure, financial reporting, the payments system,and entry and exit policies Regulatory gaps are being filled, and newinstitutions are being created The overall direction is promising, but

it will take much more time to develop institutions, particularly in the judicial area, that facilitate easy access to financial services

Legal Framework

The prevailing legal framework in Egypt still constrains the cost and terms of finance Some laws are poorly written, especiallythose regarding secured transactions, bankruptcy, and settlement

of disputes Moreover, the court system, though well reputed for its impartiality and independence, suffers from several drawbacks that keep it from helping expedite debt collection and resolve other financial disputes This is due to several reasons, the most important

of which are backlog and delay; where loan recovery procedures for bankruptcy and foreclosing on defaulters can drag on for several years There are no specialized courts for financial institutions, and nospecialized judges with adequate knowledge of financial market risks.Judges are often not acquainted with complex banking transactions and debts recovery of financial institutions, a matter that can result

in inconsistencies between courts’ judgments Enforcing a final courtjudgment (after the three to five years needed to obtain it) is complexand time-consuming

Collateral legislation is poorly enforced Property-rights registration and titling issues make it difficult for firms, especially SMEs, to useland assets as collateral Even when collateral is registered, there is

no information on its value This inadequate legal and judicial system has resulted in uncertainty and high cost, making banks reluctant to lend or choose for over collateralizing of lending An index of the costs

to create collateral shows Egypt to be ranked among the most costly.Shortcomings in rules for secured transactions have hindered access to finance Egyptian law recognizes three major forms ofsecurity, mortgage, pledge, and business charge, which are governed

by rules that have shown various shortcomings in actual practice An index of creditors’ legal rights shows Egypt to be ranked among the lowest developing countries The rules on enforcement are complex

Egypt does not have an

still constrains the cost

and terms of finance

The poorly enforced

collateral legislation,

and the shortcomings

in rules for secured

transactions have

hindered access to

finance

by design and formalistic in the extreme; procedures for enforcement

are very time-consuming (notification, attachment, and sale by public

auction); the process of sale is inefficient, resulting in very modest

proceeds; and private sale and strict foreclosure are not legal

The bankruptcy rules adhere to historical perceptions of the

bankrupt betraying creditors’ trust The law focuses on personal

bankruptcy, as opposed to corporate bankruptcy Moreover, the rules

rely on liquidation and fail to provide any regulation for reorganization,

and the process is multi-layered, complex, and time-consuming The

court plays a very active role in supervising and approving all aspects

of the process, leading to further delays The eventual outcome which

is the sale of the debtor’s assets via public auction, that results in

very low proceeds Internationally, Egypt compares unfavorably in

terms of the time it takes (more than six years), the cost (more than

25 percent of the estate), and the recovery rate (less than 20 percent)

Altogether, Egypt is ranked 106th globally in these dimensions

Information Infrastructure—Credit Registry, Credit Bureau

and Other Sources

Credit information in Egypt is inadequate and unreliable, and market

information is poor Bankers and firms have difficulty making sound

credit decisions due to lack of information on clients’ creditworthiness

and sector-related statistics The only source of credit information is

the Public Credit Registry at the Central Bank of Egypt (CBE), which

has until recently been accessible only by banks However, a new

strategy for expanding access to credit information and enhancing

the information infrastructure is being implemented Various legal,

regulatory, and institutional reforms have allowed for establishing

private credit bureaus and sharing credit information with

non-bank financial institutions This is expected to improve access to

finance, particularly for SMEs, as well as facilitate the development

of independent leasing and mortgage finance companies The

private credit bureau, ‘iScore’ is expected to improve the quality of

information, decrease the cost of obtaining credit information, and

hence the overall costs of intermediation

Financial Reporting Environment

Another factor hampering access to finance in Egypt is the quality of

financial reporting External users of corporate financial information

generally do not have enough confidence in the reliability of firms’

financial statements to make their decisions, but rather rely on the

company’s reputation, its major shareholders, and other qualitative

factors Despite progress in the setting of accounting and auditing

standards, numerous deficiencies in Egypt’s current financial

reporting environment still exist There are recurring incidents

of divergence between accounting standards as designed and as

practiced Investors are concerned about enforcement mechanisms

and the regulatory framework for accounting and auditing

The bankruptcy rules adhere to historical perceptions of the bankrupt betraying creditors’ trust

There is a lack of information on clients’ creditworthiness and sector-related statistics

The quality of financial reporting is another factor hampering access to finance

practitioners The level of users’ confidence is further eroded by theperception that university education places insufficient emphasis onkeeping accounting curricula up to date Small borrowers, especially, are overburdened with the high cost of maintaining appropriate accounting systems and the high cost of retaining qualified auditors The resulting modest quality of corporate financial reporting leads toincreased risks to lenders and investors, and in turn higher costs for borrowers.

Related to the quality of financial reporting are deficiencies in theaccounting and auditing regulatory framework and its enforcement There is no requirement for professional qualifying examination to practice auditing, no applicable peer-review practices through which auditors can provide cross-examination to each other’s working papers, and no supervisory body to monitor auditors’ working practices of auditors and enforce disciplinary actions violators A company cannot appoint an audit firm, but rather appoints an individual partner of

a firm; as a result audit firms cannot be held liable Various legaland institutional reforms undertaken so far to enhance accounting and auditing practices represent important interim arrangements However, they will eventually need to be integrated under legislation that comprehensively regulates the profession

Financial Infrastructure

Cash, cheques, and large-value inter-bank transfers are the basic means of making payments in Egypt Cash is the major instrument for individuals, and cheques are primarily used for commercial transactions and some government payments CBE operates the cheque-clearing system, and only one automated clearing house exists

in Egypt The CBE has led efforts to create a modernized systems infrastructure to cover systems operations, policies and regulations, and oversight To enhance efficiency, the maximumsettlement period has been reduced from five working days to at mosttwo; new instruments like direct debit have been added and payment cards have been introduced

payments-Nevertheless, there are challenges facing the payments system, including the legal framework covering payments and securities settlement systems, and the oversight function Furthermore, although Egypt is one of the five top countries in terms of inflows

of remittances, there are currently no particular measures in place

to control the liquidity and credit risks of cross-border transactions,

or regulations specifying minimum service levels or minimum transparency requirements for international remittances or other types of cross-border payments There is also no structured framework

to improve the efficiency of remittance services

Moreover there are

the payments system,

including the legal

framework for the

settlement system,

and the oversight

function, as well as the

lenders and investors,

and in turn higher

costs of borrowers

Entry and Exit Rules and Practices

The Egyptian financial system has suffered from significant entry and

exit barriers The banking system is subject to restrictive regulations

such as special licenses and permits, which have prevented new entry

and branch expansion, limiting competition At the same time, banks

in Egypt have not been allowed to fail Weak banks were left to

operate, while measures such as restructuring, merging or liquidation

were not applied early enough As a result, inefficient banks were

kept operating and encouraged to indulge in high-risk activities,

while sound banks were forced to subsidize them However, as part

of the reform program, the government has improved the rules and

practices for entry and exit of banks and other financial institutions,

which will ultimately increase the competitive landscape in Egypt

Policy Recommendations

The speedy completion of the financial-sector reform program and

the restructuring of state-owned financial institutions are essential

to enhance access to financial services Equally important is

improving the quality of the institutional environment and corporate

governance Enhancing the role of banks that have a huge branch

network, of the postal system, and of microfinance institutions is

crucial for the access agenda It is essential to improve and widen

the availability of financial services in Egypt, especially for small

firms and poor households, to enhance growth in the economy The

securities issuance system; institutional investment deregulation;

and the regulatory capacity and policy framework should be reformed

to enhance the primary markets Ultimately, the combination of

financial restructuring and institutional reform will make Egypt’s

financial sector more developed and efficient, leading it to provide

better-quality financial products and services, exhibiting a lower cost

of financial intermediation, and being more competitive

The gains of better financial-sector development apply especially

to small firms Small firms that have proven their ability to survive

and grow in the marketplace can be important engines of innovation,

job creation, and growth Although both large and small firms need

efficient access to financial products to remain competitive, small

firms are typically much more growth-constrained by lack of finance

Small firms’ opportunities to develop into large, successful firms are

influenced by a conducive overall investment climate—easy entry

and exit, clearly established and protected property rights and good

contract enforcement Improving access to finance allows them to

capitalize on their growth opportunities, operate on a larger scale,

and contribute more fully to economic growth

The Egyptian financial system has suffered from significant entry and exit barriers

as a result of which competition was limited and inefficient banks were allowed to continue operating

The speedy completion

of the financial sector reform program and the restructuring

of state-owned financial institutions are essential to enhance financial intermediation

Improving small firms access to finance allows them to capitalize

on their growth opportunities, operate

on a larger scale, and contribute more fully to economic growth

Enhancing the Role of the Banking Sector in Financial Intermediation

Restructuring the state-owned banks is important, not only for stability and reducing fiscal costs and contingent liabilities, butalso for access to finance The government should also continuethe institutional restructuring of the state-owned banks that are likely to remain in public hands for some time, to assure they support a competitive market Once the state-owned banks have been restructured and privatization is solidly underway, incentives for sound financial intermediation and a more competitive marketstructure will emerge As private banks identify their comparative advantage and competitive niches, and as margins are squeezed in traditional markets, access to financial services for small firms andhouseholds can be expected to increase and the quality of financialservices enhanced However, lessons from other countries suggest that reaping benefits of banking reform require a comprehensiveapproach In depth restructuring of the state-owned banks will take time to be completely implemented, but does ultimately pay off.Enhancing state-owned banks’ corporate governance is a vital step in the banking-sector reform agenda It entails formulating quantifiable performance measures; specifying how the costsassociated with providing social-public services are to be covered; commissioning annual independent bank audits; and making an ongoing assessment of costs versus outcomes The government should consider consolidating the responsibility for exercising ownership functions in the state-owned banks within a single ministry once the reform program is implemented Sound corporate governance arrangements should clearly specify the respective responsibilities, authorities, and accountabilities of the owner, board, and executive management within a well-defined legal and institutionalinfrastructure

It is crucial to fasten the role of specialized state-owned banks

in financial intermediation, and make better use of their branchnetworks This entails a comprehensive program for institutional, operational, and financial restructuring for these banks Prior torestructuring these banks a formal assessment of their future is essential, including re-examining and clarifying their mandate

in light of their current and prospective performance, considering whether any social and public policy objectives that remain valid can

be met more cost-effectively by other means An important context for such an assessment is a rethinking of the role of subsidized credit.The government should ensure that any capital injected into specialized state-owned banks is done in conjunction with their operational and institutional restructuring In the longer run, consideration could also be given to consolidating the ownership function for specialized banks If there are no realistic prospects for significant and sustained progress in restructuring these banks, thegovernment might consider privatizing them However, if the banks

Restructuring the

state-owned banks is

important, not only for

stability and reduction

step in the

banking-sector reform agenda

make better use of their

branch networks, which

entails re-examining

and clarifying their

mandate

are needed to meet certain social objects, the government could

consider alternatives such as transforming them into funds, such as

the Social Fund for Development (SFD), that might be more successful

in addressing the social agenda

The authorities should consider further privatization in the

banking sector Even with the successful implementation of the

Financial Sector Reform Program—the privatization of Bank of

Alexandria, and the full divestiture of public sector shares in joint

venture banks–public ownership in the banking system is expected

to remain as high as 48 percent Furthermore, divestiture of

state-owned banks’ share in joint venture banks by itself will not assure

their total privatization when other non-bank public entities, such

as the state-owned insurance companies and the NIB, retain shares

Empirical evidence shows that banks that were majority privatized

performed better than those that were partially privatized

Moreover, cross country experience has shown that even when

there is a sound governance structure in place to insulate

state-owned banks from direct political pressure; the need to achieve

various government policy objectives may prelude the efficiency that

a privately-owned bank would achieve in financial intermediation

Restructuring these banks does not guarantee better performance

in the future since the restructured institution may not be able to

depart from old lax management that had been at the root of current

problems The history of state-owned banks restructuring is replete

with cases of recapitalization that had gone awry—sometimes

requiring repeated waves of financial support that fail to improve the

bank’s position on a sustained basis

In the meantime, it is important that the government make

enhancing access to credit an explicit objective of the overall

banking-sector strategy With a large and stable flow of savings into the

banking system, increased competition has significant potential

to increase access As private banks identify their comparative

advantage and competitive niches, and as margins are squeezed in

traditional markets, access to financial services for small firms and

households can be expected to increase and the quality of financial

services enhanced

Most successful efforts have in common a limited direct government

role in credit granting and pricing In promoting increased access to

finance in Egypt, the government should de-emphasize subsidized

lending schemes, and instead promote commercially sustainable

expansion of access Government-subsidized credit programs mostly

have proven costly failures because they undermine the commercial

incentives for both banks and borrowers as well as introduce

other distortions; moreover, they can give rise to the potential for

corruption in the allocation of subsidized funds Governments should

remove policies that either unnecessarily impede the ability of banks

to design, price, and offer loan products, or that undermine the

commercial incentive structure for banks or borrowers

Further privatization should be considered since even when there

is a sound governance structure in place to insulate state-owned banks from direct political pressure; the need to achieve various government policy objectives may prelude the efficiency that a privately- owned bank would achieve in financial intermediation

The government should de-emphasize subsidized lending schemes, and instead promote commercially sustainable expansion

of access

Expanding Postal System and Microfinance Institutions

The postal system’s potential contribution to improved access to financial services is great, especially in rural areas, and is crucial forenhancing access in Egypt as a whole Authorities can make better use

of the network of postal offices to expand access by encouraging EgyptPost to diversify the range of services it offers Such diversificationmay entail distribution of credit, provided it is regulated by CBE, which would require postal financial services being institutionallysplit from Egypt Post Another option would be for Egypt Post to distribute credit on behalf of a commercial bank through a strategic partnership, which would not require a banking license Such

an ambitious diversification strategy entails capacity-building inmany fields, including cost accounting, negotiations, market-drivenproduct development, and information technologies The government should promote the complete integration of all postal outlets into its online network to enhance postal payments and savings products, and consider using this distribution and IT infrastructure for credit extension, tapping relevant international expertise to promote successful expansion

Microfinance offers a mean of addressing the household andsmall firms’ demand for access to financial services Egypt appearsrelatively well advanced in its adoption of the business and lending practices associated with the commercially sustainable provision of microfinance This experience could be tapped to improve access tofinancial services, especially credit Microfinance business practices,involving specialized lending techniques, incentive-based loan officercompensation policies, and information technology capabilities, have broad application to the SME lending market Some banks might therefore profitably apply microfinance policies and practices towardthe SME sector

State-owned banks should be encouraged to make full use

of the opportunity At the same time, banks that have recently penetrated the small-business finance market and have been active

in providing microfinance should be cautious in selecting creditpolicies or procedures and in employing sufficiently skilled staff It

is also important to ensure that the current banks’ regulatory and supervisory practices do not unnecessarily inhibit the broader adoption

of these practices The constraints, for example, to wholesale lending

by commercial banks to microfinance lenders that should be removed Pursuing and leveraging the National Strategy for Microfinance is animportant action

Promoting Capital Markets in the Access Agenda

Egypt is relatively well endowed with the ingredients for a functioning primary securities market The government’s reform commitment remains strong, the securities industry is becoming more active, and foreign investors’ interest remains high However, capital-market reforms in Egypt to date have mainly focused on

well-The postal system’s

mean of addressing the

household and small

firms’ demand for

financial services

Leveraging Egypt’s

knowledge and

experience with micro

lending and pursuing

the national strategy

for microfinance are

important steps

Egypt is relatively

well endowed with the

ingredients for a

well-functioning primary

securities market

secondary markets and have not extended to easing firms’ access to

securities markets through new issuance Direct firm finance in the

capital markets should be recognized as a priority in Egypt’s overall

financial sector reforms The government should place a higher

priority on primary market development, which would help raise

long-term funds for the productive sectors

Reform measures would involve reducing issuance costs, deepening

investor base and creating an issuer-friendly policy and regulatory

environment On lowering issuance costs, various legal reforms are

needed, including improving legal procedures for securities issuance,

completing the recently begun shift from a merit-based to a

disclosure-based system, increasing managerial efficiency of regulators and

streamlining any increased disclosure requirements and procedures,

as well as, increase government bond liquidity Deepening the

investor base could be attained by enhancing collective investment

schemes regulations, developing retail programs for privatization

initial public offering (IPO), and expediting the consolidation among

brokers and promoting competition

Creating a more issuer-friendly regulatory framework could be

achieved through various measures, including reinforcing the new

Corporate Finance Division (CFD) at the Capital Market Authority

(CMA) with competent staff to champion direct corporate financing

through securities issuance; improving CMA statistical system to

conform to the World Federation of Exchanges (WFE) standards;

strengthening its capacity in data and information dissemination;

and improving information disclosure at CMA and the Cairo and

Alexandria Stock Exchange (CASE) to enable investors obtain more

information regarding corporate governance structure and important

corporate actions

A more reliable yield curve should be created for private issuers

through reducing non-tradable government bonds and implementing

regulations for repurchase and for securities lending and borrowing

The authorities should also consider removing CMA approval of CASE

board decisions and review the CASE ownership and governance

structure CMA should proceed with its public-awareness campaign,

to increase the public’s information on the capital market instruments

and develop a better understanding of the risks and returns involved

in investing in these instruments This will also help enhance average

retail investors’ basic knowledge of capital market investments

Raising awareness of new instruments, such as hybrid bonds with

equity elements for corporate finance, is crucial New equity markets

for ventures and high growth firms need to be studied

Importantly, these actions should be implemented within the

context of a well-designed overall strategy A National Capital Market

Development Strategy should be established in coordination with

the government debt market and privatization policies, within the

framework of the existing Financial Sector Reform Program This

strategy should include four main pillars: promoting the external

financing of Egyptian firms; fostering more direct and indirect

but the government should place a higher priority on primary market development, that would help raise long-term funds for the productive sectors

A more reliable yield curve should be created for private issuers through reducing non-tradable government bonds and implementing regulations for repurchase and for securities lending and borrowing

These actions should

be implemented within

a well-designed overall National Capital Market Development Strategy

There is also a need to reduce issuance costs, deepen investor base, and create issuer- friendly regulatory framework

securities holdings by households; enhancing the competitiveness of the capital market industry; and accelerating the integration of the Egyptian capital market in the MENA region and the world at large.

Contractual Savings Industry Potentials for Growth

The beneficial role of insurance and contractual savings foreconomic development is becoming more evident Recent research has demonstrated that the development of contractual savings institutions is associated with efficiency gains at the firm level,including increased availability of long-term finance, reduced costs ofcapital, and greater resilience in the private sector to external shocks These benefits come about in more market-based economies through

a decrease in firms’ leverage (at least in the formal sector) In morebank-based systems, insurance and contractual savings development leads to an increase in the maturity of debt The development of insurance and contractual savings institutions also lets governments transfer common, good obligations, such as insurance against income loss, unforeseen natural events, adverse health, and old-age security–

to markets, thus enabling governments to target their expenditures more efficiently at those functions that cannot be served by markets.The Egyptian contractual savings industry has considerable potential for growth and efficiency gains, thereby improving access

to finance for firms Egypt should be able to at least double real term funds under management within a decade The contractual savings sector can then become an important source of investment financing, as is usually the case in more-developed economies Thiswill require, besides general economic development, many specificreforms in both the near and long term The near-term reform agenda entails the restructuring of existing institutions; developing

long-a professionlong-al investment-mlong-anlong-agement industry; encourlong-aging better asset management; and stimulating the supply of investment-grade schemes issued by the real estate sector

Further developing the contractual savings industry and ensuring that institutional investors become a major source of financing willrequire in the medium-term enhancing the participation of the private sector, and continuing the restructuring of state-owned insurance companies; improving investment management; strengthening the supervisory and regulatory authority; and adopting a long-term pension-reform strategy Other reform measures include easing the investment limits for insurers and moving towards a prudent investor regime; and removing all direct taxes on savings and reviewing the finaltaxesonlong-termsavings.Specificactionsrecommendedinclude,inter-alia, carrying out a thorough review of funding levels (using international actuarial skills and working with the local actuarial profession); developing a resolution strategy if needed; developing

a larger cadre of local actuaries trained to do pensions work; and allowing outsourcing to professional fund managers and third-party administrators, including qualified insurance companies

The contractual

savings industry has

considerable potential

for growth and

efficiency gains, thereby

improving access to

finance for firms

The short-term reform

agenda entails the

asset management; and

stimulating the supply

of investment-grade

schemes issued by the

real estate sector

Developing the Mortgage Finance Market

Affordable housing finance not only provides a much-needed social

good, but also generally facilitates access to finance by making an

important asset available as collateral To improve access to housing

finance, it is crucial to have a private-sector-led mortgage finance

system; market competition among primary lenders; longer-term

market-based funding from institutional and private investors; and

measures enabling primary lenders to alleviate and better manage

the associated financial risks, particularly credit risk

The key required reforms in the short-term include: strengthening

the regulatory and institutional framework for the mortgage market;

streamlining property registration procedures; and developing the

EMRC However, in the intermediate and long term, the government

needs to transform EMRC into a securitization company, and develop

smarter and targeted housing subsidies The Guarantee and Subsidy

Fund (GSF) also needs to adjust and monitor a new program of

credit-linked subsidies to favor the accessibility of underserved groups,

according to housing markets and credit-affordability limits

The development of an active secondary mortgage market will

also require a comprehensive evolution of the regulatory framework

A specific aspect is the rules for those securities designed to be

secure, as that will importantly drive the demand for securitized

instruments Also, banks and specialized mortgage companies will

need to be placed on a level playing field with respect to permitted

leverage ratios Further regulations will be needed, notably by CMA,

regarding the disclosure and listing of these specific instruments as

far as information about the mortgage pool is concerned

To work efficiently and at low cost, securitization requires the

existence of a robust institutional infrastructure This includes rating

agencies on which investors can rely for accurate information and

assessments of the issued securities and also of credit enhancement

from collateral cash flow, such as subordinated securities or third

parties (including pool insurance provided by mortgage insurers or bond

insurers to manage the credit and agency risk inherent in third-party

organization and servicing) It also requires large volumes of mortgages

to be securitized in order to keep per-unit operating costs low

Increasing Financial Leasing Industry’s Contribution to

Access

The financial leasing industry can play a very important role in

developing financial markets and providing finance to enterprises

Financial leasing companies have a dual role, they complement the

banking sector by increasing the range of products and services; while

they compete with the banking sector, forcing it to be more efficient

and responsive to customers’ needs Financial leasing companies can

especially help small-scale firms that face problems obtaining credit

from banks In addition, leasing plant and equipment is extensively

Affordable housing finance not only provides a much-needed social good, but also generally facilitates access to finance by making an important asset available as collateral

In the long-term the mortgage refinance company needs to be transformed into a securitization company

The financial leasing industry can play a very important role in developing financial markets and providing finance to enterprises

Required reforms include strengthening the regulatory and institutional framework for the mortgage market; streamlining property registration procedures; and developing the Egyptian Mortgage Refinance Company

used in many developed economies as a means of expanding large firms’ access to credit, including through term finance.

Short-term measures that can boost the leasing sector in Egypt include, ensuring that the leasing law contains a clear, precise definition of leasing; amending the law to remove any differentiationbased on the type of assets leased, allowing leasing of non-commercial purposes, and permitting banks to offer financial leasing productswithout having to establish separate entities, and enhancing the institutional capacity by upgrading registry procedures for leased assets A dedicated regulator and an active organization of leasing companies would allow the leasing industry to have more visibility and attract more clients

Long-term measures include, building a supportive regulatory environment and a strong judicial system with clear rules for assigning property rights; strengthening the information infrastructure; improving the dissemination of information on the leasing industry enforcement of foreclosures; and facilitating repossession of assets in case of default It is also crucial to impose accounting standards that comply with the International Accounting Standards (IAS) and adhere

to Anti Money Laundering and Combating Terrorism Financing (AML/CTF) standards Other long-term measures include providing leasing firms with better access to long-term funding sources,where developing the bond market and asset-backed securities market through effective implementation of the securitization law is important in this respect

Developing the Factoring Industry

The factoring industry should be strongly encouraged in Egypt Developing this industry would require extensive efforts since factoring involves the sale of (a portfolio of) receivables, where the credit information on inter-enterprise credit is a major basis for analyzing the asset’s creditworthiness It is crucial to give factoring firms access to information on clients’ creditworthiness, and not justrequire them to provide such information Developing an adequate legal mechanism for enforcing collection of receivables and legal rights of creditors is important While better enforcement is needed

in general to enhance financial intermediation, this recommendationapplies particularly to factoring

Improving the Institutional Environment

Fostering greater access to financial services requires improving theinstitutional environment, to allow for the emergence of an efficient,increasingly private-led financial system, which will better serveEgypt’s development and growth objectives Improving the legal framework, enhancing the credit-information system, improving financial reporting, and modernizing the payments system are keypriorities The quality and enforcement of property rights and the availability of information are especially important for SMEs’ access

Legal Reforms

Legal reforms to improve the lending environment relate not only

to how laws are drafted but to how they are being implemented In

the past, policy-makers have often avoided legal reforms because that

they would only bear fruit after a few years after long debates at

the parliaments This has deprived Egypt of the benefits of reforms

that, had they been initiated in the mid-1990s, would have resulted

in a significantly different the legal landscape today Therefore, it is

paramount for Egypt to focus on legal reforms today, especially for

secured transactions, bankruptcy, and the court system

A full appreciation by policy-makers of the role of collateral

in providing finance is the starting point for reforming the law on

secured transactions Reforms should entail revisiting the theoretical

foundations of the law, its policy objectives, and the substantive

and procedural provisions the law should embody The Model Law

on Secured Transactions, prepared by the European Bank for

Reconstruction and Development (EBRD), serves as a useful model

for policy-makers to consider This Law introduces Common Law

concepts that can facilitate the taking of security; in so doing it has

provided some safeguards that reflect Civil Law traditions while

departing from those Civil Law concepts that represent a major

impediment Legal reforms would have to address the core problems

facing lenders and aim to provide legal solutions that eliminate

difficulties Policy-makers should opt for a comprehensive approach,

avoiding piecemeal solutions that have complicated and confused the

legal system in the past

It is not merely that minor legislative changes are needed; rather

the entire system of bankruptcy rules should be re-conceptualized

Lawyers, economists, bankers, and policy-makers need to agree on

the objectives of the law It should be clear that the role of bankruptcy

provisions is to provide ailing firms with an orderly means of exit

through the liquidation process; to help reallocate assets to better

uses through rehabilitation; and to ensure a timely resolution of

the problems of insolvent or financially distressed firms, while at

the same time ensuring a socially efficient disposition of distressed

firms’ assets Accordingly, the existing rules on bankruptcy should be

amended to ensure that there are adequate provisions on corporate

bankruptcy; a comprehensive regulation for reorganization; a simpler

process; and a more proactive role for creditors

Reforming the judicial system to overcome its difficulties is a

term process that requires policy-makers’ commitment and

long-term vision Judicial reform is not only important to lenders and

related to access to finance, but a matter that affects foreign and local

investments While recent efforts have partially improved the lending

environment, without comprehensive reforms it would be difficult to

envisage real improvements in the legal environment affecting access

to finance Specific policy changes to address the judicial inefficiencies

include streamlining the flow of cases to ensure that only genuine

cases, and not frivolous ones, are entertained by the courts Here, the

Legal reforms to improve the lending environment relate not only to how laws are drafted but to how they are being implemented

A full appreciation of the role of collateral

in providing finance is the starting point for reforming the law on secured transactions

The entire system

of bankruptcy rules should be re- conceptualized

Reforming the judicial system is a long-term process that requires commitment and long- term vision

Policy-makers should opt for a comprehensive approach, avoiding piecemeal solutions that have complicated and confused the legal system in the past