The National Bank of Egypt (NBE) and Banque Misr, the country’s largest state-owned banks, issued their highest-ever yielding certificates of deposit on 4 January at an annual interest rate of 25 per cent. They offer 22.5 per cent if investors opt to cash the interest on a monthly basis.
The move followed the Central Bank of Egypt’s (CBE) decision on the same day to devalue the Egyptian pound against the US dollar for the third time since March last year, meaning that the national currency has lost more than 60 per cent of its value against the greenback over the same period.
The new certificates have been issued to encourage people to convert their dollars into the national currency, helping to absorb liquidity from the market and lower the country’s soaring inflation.
Proceeds from selling the new certificates have exceeded LE100 billion over four days, NBE Deputy Chairman Yehia Abul-Fotouh said on television on Sunday night.
He added that around LE66 billion had gone to the NBE and the balance to Banque Misr.
About 50 per cent of the LE100 billion was fresh money pouring into the banking sector and not acquired through breaking into other deposits or liquidating lower-yielding certificates, he added.
Many people had opted to convert their dollars into pounds to buy the new certificates, Abul-Fotouh said.
The demand for the new certificates has been huge, leading the NBE to open 146 branches and Banque Misr 126 branches nationwide on Friday and Sunday to receive depositors wishing to buy them. Friday is a holiday for the banks in Egypt, and Sunday was designated a national holiday in celebration of Coptic Christmas.
Many people closed their previous certificates of deposit to buy the new higher-yielding ones. Cairo resident Amira, 70, went to Banque Misr to cancel the certificates she had bought in April last year to buy the new higher-yielding ones, while Ahmed, 50, headed to the NBE to cancel his previous LE50,000 certificate.
The 4 January announcement came on the heels of the depreciation of the pound from LE24.7 to more than LE26 against the dollar, losing 14.5 per cent of its value in the second depreciation of the national currency since Egypt acquired a new loan from the International Monetary Fund (IMF) at the end of October.
Since the announcement, the pound has been steadily losing ground against the dollar.
“The new certificates will negatively affect bank profits, especially because the CBE has instructed the banks to raise their reserve requirement to 18 per cent on short-yield deposits,” said Amany Shaaban, a financial analyst with Prime, an investment bank.
The fact that the 25 per cent yields are to be paid at the end of the year, however, should give the banks enough time to collect the liquidity necessary to pay back depositors when the yields are due, she added.
Banque Misr’s net profits rose to LE8.507 billion in the first half of 2022, up from LE6.315 billion in the first half of 2021. Total profits before tax amounted to LE15.088 billion, up from LE13.189 billion during the same period the year before.
The NBE’s net profits in the first quarter of the 2022-23 fiscal year amounted to LE11.655 billion, rising by 21.7 per cent from LE9.573 billion in the same period the year before, according to financial statements on the NBE website.
Shaaban expects the majority of the new certificates to be bought by depositors who have closed their old certificates. She referred to an earlier occasion on which the CBE announced the issue of certificates offering yields of 18 per cent, causing depositors to close their earlier certificates offering 14 or 16 per cent to buy the new ones.
She said that it was unlikely that those holding gold or dollars would convert them into pounds to buy the new certificates, since these two assets are considered to be safe-haven investments for many Egyptians.
She added that the CBE had introduced the new certificates to discourage dollarisation.
Raising the interest rates on certificates of deposit will likely reduce the attractiveness of other investments, as investors are likely to opt to put their money in the high-yielding certificates rather than invest it in investment projects in a risky economic environment, Shaaban said.
Basil Shaira, head of the Industrial Development Division at the Federation of Egyptian Industries, disagreed, however. He said it would be difficult for investors in industry to opt to buy the new certificates because their aim is to expand their businesses.
The new certificates would be more attractive to real-estate investors working in the residential sector, he said, adding that increasing the interest rate for borrowers would not help to grow the industrial sector, something that is crucial to prevent its shrinkage.
In its last meeting in 2022, the CBE’s Monetary Policy Committee (MPC) raised interest rates by 300 basis points to contain inflationary pressures. The meeting set overnight deposit, lending, and main operations rates at 16.25 per cent, 17.25 per cent, and 16.75 per cent, respectively, while credit and discount rates were raised to 16.75 per cent.
While raising interest rates negatively affects the stock market as it offers better-yielding alternatives for traded shares, this was not the case last week.
The depreciation of the pound has made Egyptian stocks cheaper for foreign buyers and has thus attracted both Arab and foreign investors, Shaaban said, adding that the 4 January devaluation had positively affected the Egyptian Stock Market.
The EGX30 Index of leading shares rose by 3.25 per cent to close at 15,557 points on the same day.
* A version of this article appears in print in the 12 January, 2023 edition of Al-Ahram Weekly
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