Loan Scandal Threatens Egypt’s Banks

Audiences join in enthusiastically when star comedian Adel Imam breaks into song about their real-life problem.

“Egypt is for sale, but the buyers-to-be have already ripped it off. So what can they buy? What can they buy?” Imam and his audience chant at the musical climax of a play satirizing Egypt’s troubled banks.

People may laugh about it along with Imam, but nearly everyone understands the threat posed to the economy by huge sweetheart loans that banks gave to well-connected businessmen and politicians with little regard to whether they would be repaid.

Many worry that Egypt could face a financial crisis like the one that sent Southeast Asia into an economic slide in the late 1990s.

“If one major bank collapses, it will pull with it a chain of other banks, and we can imagine the result,” said an opposition lawmaker, Ayman Nour.

With no firm figures on the extent of bad loans, speculation has run wild. Some fear it is enough to account for a liquidity crunch that has pushed interest rates up and undercut financial markets, although economists also point to lax monetary policy, heavy government borrowing and state spending on several large development projects as factors.

In an effort to help the credit market, President Hosni Mubarak has ordered his government to repay all its domestic debts, estimated at $7.2 billion, by the end of the year.

Mubarak reportedly told a group of intellectuals that he also personally intervened to stop banks from lending $231 million to two investors in a steel firm. The two were later arrested in a loan scandal.

The government has sent several cases involving bad loans to special security courts usually reserved for terrorists. It also reportedly banned dozens of businesspeople with large outstanding loans from traveling abroad and asked Interpol for help in tracing some borrowers who fled the country without repaying loans.

Critics say the government could do more to allay depositors’ fears by taking swifter action and being more open about what has happened.

A nearly five-year case involving executives of the partly state-owned Nile Bank and several legislators ended in June with 32 defendants receiving harsh prison sentences. During the trial, two of the defendants, bank manager Aliya el-Ayouti and bank executive Hossm el-Minawi, fled the country owing $87 million in loans.

In another case, businessman Hatim al-Hawari disappeared while reportedly owing $56 million in loans, mostly from the state-owned Cairo Bank.

Such news has been unsettling for depositors, mostly middle-class and small investors, who lost billions of dollars when Egyptian investment companies went bankrupt in the 1980s in collapses blamed on mismanagement and fraud.

Nour, the opposition lawmaker, has repeatedly called for a parliamentary debate on the loan scandal, only to be told now is not the time. Associated Press requests for comment from government and Central Bank officials were denied or ignored.

The World Bank official responsible for Egypt, Kemal Dervis, declined to say much about the sensitive issue, but he acknowledged “mistakes” had been made.

“I hope the mistakes will be corrected,” he said in an interview. “Any problem in the banking system will have multiple effects on the entire economy.”

The World Bank has been working with Egypt since 1991 on financial and economic reforms, including making suggestions for improving bank management and for increasing domestic savings through interest and credit liberalization and increasing private involvement in commercial banking, securities and insurance.

A former economic planning minister, Ismail Sabri Abdellah, traces the loan problem in part to poor procedures in the banking system. He said the Central Bank doesn’t adequately monitor lending practices and loan portfolios to ensure that banks do not become overexposed to clients and that loans are backed by adequate guarantees.

“Most of the loans are given without proper vetting of the financial situation of the beneficiaries,” he said in an interview.

In the Nile Bank case, bank executives, their spouses and some shareholders received loans that totaled more than $345 million, or 10% of the bank’s assets, without the Central Bank’s approval.

Some analysts say Egypt has too many banks--65, with a total of nearly $100 billion in assets--so there is fierce competition to attract loan takers.

Lending has skyrocketed, according to the most recent government figures. As of last September, banks had a total of $57.5 billion in outstanding loans, compared with $28.5 billion three years earlier.

Egypt began allowing private banks in 1974, when then-President Anwar Sadat started to reform a socialist economy. Of the 65, four are fully state owned, while the rest are private, foreign or partially owned by the Egyptian government.

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Central Bank of Egypt: https://www.cbe.org.eg