The overall deposits in Egyptian banks reached LE4.2 trillion by the end of June, according to the monthly bulletin of the Central Bank of Egypt (CBE). This represents a 12 per cent increase year-on-year and a whopping 88 per cent jump since June 2016 which came five months before the government’s loan agreement with the International Monetary Fund (IMF) and the devaluation of the Egyptian pound.
The unprecedented increase over the last three years in the value of the deposits, the main source for bank loans and investments, can be mainly attributed to the devaluation, as while the pound lost almost 50 per cent of its value, the value of deposits in foreign currencies doubled.
The introduction of high-yield deposit certificates after the devaluation attracted around LE750 billion in the period between their introduction in November 2016 to February 2018 when the CBE decided to reduce rates and stop issuing high-yield certificates.
The household sector, meaning individuals, alone corners 83 per cent of local currency deposits with higher interest rates. It also holds 67 per cent of deposits in foreign currencies.
This high share of household deposits has been seen since 2010, as many people worried by the political and economic turbulence of the post-25 January Revolution found a safe haven for their savings in the banks. The trend intensified after the devaluation, as individuals were allured by the high-interest rates that the CBE introduced to rein in inflation.
In November 2016, the public-sector banks issued one year and 18 month certificates yielding 20 and 16 per cent, respectively.
The fact that the household sector dominates bank deposits in Egypt is seen in different ways by economists. Some consider it to be an unhealthy indicator, as most deposits should be from the private sector, they say, since it is the money needed to finance projects needed to create job opportunities and thus spur economic growth.
But others believe it is an advantage, as individuals’ investment decisions usually come after long periods of thought, meaning that the value of the deposits could be stable for long periods, unlike other deposits that may be withdrawn depending on investment plans.
Inflationary pressures together with the increased cost of borrowing from the banks have pushed many businessmen to withdraw deposits to finance projects.
While the private sector usually depends on bank credit to finance projects, the rise in interest rates and Egypt’s entry into an economic reform programme have pushed the private sector to rely on its own deposits to finance projects. The private sector has suffered from years of post-revolution political and economic turmoil, resulting in the postponement of expansion plans and the fleeing of many investments.
The high value of deposits is only a plus if they are well invested in loans and investments. But unfortunately this may not be case, as with total loans standing at LE1.84 trillion, the ratio of loans given by the banks to their deposits comes in at around 45 per cent, an exceptionally low rate when compared to the 90-120 per cent rate in the developed economies, including the Gulf countries.
While the bulk of loans are directed to the private sector, at almost 55 per cent, this is far less than the figure before the revolution, when it was around 85-90 per cent. Observers say this is due to the fact that the sector has sharply cut its expansion plans due to successive increases in the cost of energy and raw materials, as well as the hike in interest rates making the cost of credit exceptionally high.
Interest rates increased by 10 per cent in the period from December 2015 to the same month of 2017, recording 19.75 per cent on lending, before they started falling again to reach 15.25 per cent at present.
State bodies have had to fill the gap left by the private sector since the revolution and invest heavily in infrastructure and energy projects, thus acquiring a huge sum of loans.
Loans given to households represent only 18 per cent of overall loans, reflecting the fact that people rarely take out bank loans to finance purchases of cars or houses. In general, Egypt is underbanked, with less than 10 per cent of the population having bank accounts.
This is expected to improve with the CBE’s prioritising financial inclusion and encouraging the introduction of high-tech user-friendly banking services such as mobile banking.
*A version of this article appears in print in the 19 September, 2019 edition of Al-Ahram Weekly.