North African Banking: Politics Shapes The Landscape

Governments and banks enjoy a co-dependent relationship. Governments rely on banks to finance short- and long-term debt, while banks need stable government in order to prosper. The Arab Spring has therefore threatened to change the banking landscape of North Africa. Political revolution has created short-term economic uncertainty, but the prospect of a more open investment environment and transparent financial dealings suggest that the region’s banks may benefit from the revolutions in the long term.

Banks generally hold a great deal of sovereign debt and so the threat of a government default undermines the entire financial stability of any nation. Investors have therefore keenly awaited any statement from the credit ratings agencies. The Egyptian banking sector as a whole received a boost in late August, when Standard & Poor’s decided not to downgrade the existing B credit ratings of three banks: Commercial International Bank, National Bank of Egypt and Banque Misr. The fact that National Bank of Egypt and Banque Misr are state-owned entities ties their fate even more closely to that of government debt.

Standard & Poor’s lifted their ‘Negative Watch’ status that had been imposed when the Egyptian government applied for a $4.8bn loan from the IMF. On principle, credit risk agencies do not award better credit ratings to bank debt than to sovereign debt.

A spokesperson for the agency said: “In our view, [the banks] face significant sovereign risk because they hold a high amount of government debt compared with their equity base and earnings capacity. Our ratings do not exceed those on the sovereign because we do not believe that the banks would withstand a scenario where Egypt defaulted on its obligations.” It remains to be seen whether the IMF will demand cuts in government subsidies on staple foods and fuel in return for the loan.

The political winds of change that brought moderate Islamist parties to power in Morocco, Tunisia and Egypt are also driving investment in Islamic finance in the region. Islamic banking had been notable by its virtual absence in North Africa but Sharia-compliant financial services moved quickly to promote its cause when the Arab Spring began. Indeed, the General Council for Islamic Banks and Financial Institutions decided to organise the Maghreb Forum for Islamic Finance in Tunis, as early as last July.

Egyptian banks looks to stable government

The fate of Egyptian banks is closely tied to that of the country’s new political settlement. After months of mistrust and disagreement, the Egyptian military establishment and the ruling Islamist Freedom and Justice Party have reached a working arrangement to enable the country to get back on its feet.

President Mohammed Morsi, the country’s first democratically elected civilian president, thus far appears to be following the Turkish model of moderate Islamist government. He is seeking to reduce his country’s dependence on the US while simultaneously attacking dictators in the Middle East and promoting economic reforms.

Credit ratings agency Fitch argues: “As long as a degree of certainty returns to the political sphere, and a Morsi-led administration can both inspire confidence and implement economic reforms, Egypt’s banking sector should be able to weather any short-term difficulties.” However, in the short term at least, privately owned Egyptian banks have actually benefited from national economic instability, through higher yields on government securities.

The banks’ already high exposure to sovereign debt is likely to increase as the government continues to rely on domestic loans to fund spending. The projected budget deficit for 2012 stands at a massive 10% of GDP. Egyptian banks’ government debt holdings increased to 550% of total equity by the end of 2011, bringing their own credit profiles in line with the credit risk of the sovereign.

Cairo is banking on IMF support to see it through the next 12 months but another important Islamist group, the Salafist Nour Party, opposes any government loans from the IMF or other multilaterals on the grounds that they are ‘un-Islamic’.

However, Egypt has received financial support from a wide range of other sources. The central bank has benefitted from a $1bn loan from the government of Saudi Arabia, while Qatar has already paid $500m of its promised $2bn loan to the central bank, following on from last year’s $500m grant.

The Islamic Development Bank (IDB) has provided a further $1bn to fund food and energy imports, while the Chinese government has agreed to provide a $200m credit line for the National Bank of Egypt. Beijing has previously condemned the popular Egyptian uprising because of the obvious implications for its own undemocratic system.

The political crisis may also speed up changes in the foreign ownership of Egyptian banking assets. Egyptian investment bank EFG Hermes plans to form an alliance with QInvest of Qatar in order to fund expansion plans. QInvest has already bought a stake in EFG, although the deal is still being assessed by the Egyptian regulators.

The bank has benefited from its wide exposure to treasury securities and recorded a small increase in operating income. However, its net profit of E£27m ($4.4m) for the second quarter of this year was a big fall on the E£80m ($13m) figure recorded for the same period last year.

At the end of July, the National Bank of Abu Dhabi (NBAD) announced that it was interested in buying the Egyptian operations of French banks. NBAD chief executive Michael Tomalin said: “We would look at opportunistically using our capital to acquire, subject to the tests set out before.”

The bank, which is already active in the country, is particularly keen on assets that would provide it with a controlling stake in any bank. Egypt, however, is only one of many markets where it is looking to expand.

Several French and other European banks are seeking to reduce their involvement in Egyptian financial services, partly because of ongoing uncertainty in the country but mainly in order to shore up their core operations in Europe itself.

It has been widely reported that French bank BNP Paribas has already decided to seek offers for its retail banking operations in Egypt. The bank operates more than 65 branches in the country and analysts have variously put the value of its assets at between $300m and $400m. Piraeus Bank of Greece had also sought to sell off its Egyptian assets but appears to have shelved or cancelled the plan, presumably because of the lack of attractive offers.

Recovery in Tunisia

As the first country in the region to expel its longstanding president and political elite, Tunisia has also been the first to seek to implement economic and political reforms.

Despite the upheavals of the past 18 months, Tunisian banks have posted some highly respectable results in recent weeks. The IMF forecasts that GDP will grow by 2.7% this year and 3.5% in 2013, following a 1.8% contraction in 2011.

Tunis is more optimistic regarding the prospects for a strong recovery based on foreign direct investment (FDI) and a recovery in tourist numbers. The IMF added that annual economic growth could reach 6% by 2017, providing the required reforms were introduced, including in the financial sector, where non-performing loans and bank recapitalisation remained problems.

The IMF is currently preparing a long term technical assistance programme for Tunisia “aimed mainly at strengthening banking supervision”.

Aabed Al Zeera, the chief executive officer of International Investment Bank (IBB), an Islamic investment bank that is active in Tunisia, commented: “Last year was a particularly challenging year given the aftermath of the financial crisis, the continuous downturn in the world economy and the Eurozone predicament which have all adversely affected investors’ confidence.

“The Middle East and North Africa region was particularly badly hit; not least because of the Arab Spring … The knock-on effects of these factors negatively impacted investment activity and business development, as well as consumer spending and confidence.”

The IMF concurred: “Risks to the short term outlook are large and tilted to the downside, including a worse than anticipated recession in Europe which would depress exports, an escalation of domestic social tensions which would hamper foreign and domestic investment, and capacity constraints and delays in financing which could curb the envisaged growth supporting fiscal stimulus.”

On a more positive note, the new government has pledged to encourage the country’s banks to improve access to credit for SMEs, although more details must be added to the plans before they can be more fully assessed.

Elsewhere, the Fund has asked the central bank to draw up a crisis management plan to support struggling banks. A spokesperson for the Fund said: “The current circumstances provide an opportunity to revisit the rationale for and the modes of state intervention. Public banks have been used to support non-viable state-owned enterprises and activities, their governance arrangements have been weak, and they have been staffed mainly with civil servants with no banking experience. In addition to addressing these issues, the major state-owned banks should be subject to in-depth audits by international firms, including assessments of their viability if significant recapitalisation needs are identified.”

Moroccan banks look south

Morocco managed to avoid the political upheavals of 2011, partly because the royal family and government promised to grant political and economic reforms from above, rather than wait for them to be imposed from below.

However, the Moroccan economy has slowed down over the past year as a result of contagion from the intensifying Eurozone crisis on the opposite side of the Mediterranean Sea, the impact of poor weather on the domestic agricultural sector and general global economic uncertainty.

Crisis in the Eurozone and Morocco’s close economic relations with the EU have persuaded Morocco’s biggest bank, Attijariwafa, to look elsewhere for future growth. It is already operating in 12 other African countries and hopes to expand into eight more by 2015.

Many other banks are adopting a similar strategy in order to take advantage of the boom in the provision of banking services to a greater proportion of the African population. Attijariwafa, which is partly owned by the Moroccan royal family, recorded a modest 2.8% rise in profits for the first half of this year, to D2.7bn ($300m), much lower than last year’s 15% increase.

Morocco’s second-biggest bank by market capitalisation, Banque Centrale Populaire (BCP), has offered a 5% stake in itself to the World Bank’s International Finance Corporation (IFC) for $190m to help fund its own expansion into the rest of the African continent.

Anne Kamau, an analyst at the Africa Growth Initiative at the Brookings Institute, commented: “Pan-African banking leads to greater economic activity by facilitating credit and investment. African economies are growing so strongly today compared to Europe and North America thanks to enhanced financial services.”

BCP has already set up a joint venture with the Atlantic Financial Group to offer banking services in the seven countries of the West African Economic and Monetary Union (UEMOA), including via its subsidiary in CÔte d’Ivoire, Banque Atlantique CÔte d’Ivoire (BACI).

The head of BCP’s international operations, Rachid Agoumi, said: “We are going to invest around MD1bn ($113m). BACI needs liquidity. We are going to inject this amount for the development of the group … That will permit us to be in seven African countries.”

BCP already operates in the Central African Republic and Guinea, and it is clear that Moroccan banks are now competing with rivals in South Africa, Kenya, France and the UK, in positioning themselves as pan-African banks.

The government of neighbouring Algeria also survived the Arab Spring and has been sheltered from the impact of the global financial crisis to a large extent.

The country’s financial health is buoyed by a relatively tiny external debt of $4bn and large reserves of $183bn, which are designed to balance out fluctuations in oil and gas income.

Despite lower than anticipated demand from European customers, the hydrocarbon-dependent Algerian economy benefited from strong gas and particularly oil prices in 2011. Total government income from oil and gas jumped by 27.3% in comparison with 2010 revenues.

Algerian innovation

Algeria’s non-oil economy remains limited and the state retains a high level of control in many areas. In addition, the Algerian banking sector generally attracts less attention than anywhere else in North Africa, with the exception of Libya, and its banks do not feature prominently in African Business’s survey of Top African Banks. Nevertheless, the IMF and other international financial organisations report that the Algerian banking sector enjoys high levels of liquidity and well capitalised, profitable banks. In addition, the proportion of non-performing loans fell from 22.1% in 2007 to 14.9% in June 2010, suggesting that the nation’s banks learnt the lessons of less fortunate economies.

There is also an unexpected amount of innovation among the country’s 20 licensed banks. Algeria Gulf Bank, which is mainly owned by KIPCO of Kuwait, has begun to introduce self banking services and drive-in banks.

The former are ATMs with a wide range of services, including chequebook ordering, cash depositing and currency exchange. The government recently increased the powers of the Bank of Algeria to regulate the banking sector and was given the power to introduce its own ratings system for Algerian banks, with support from the IMF and the US government.

The Algerian government has announced that it will encourage foreign investment in the domestic banking sector in order to reduce financing costs for individuals and SMEs. While some analysts have criticised continued restrictions on foreign investment in Algerian financial services, substantial progress has been made in recent years.

Total lending increased by 16% in 2010, in line with growth over the period 2007–09, to AD3.27 trillion ($12bn), including a 29% increase in SME lending to AD830bn ($10bn). The proportion of medium- and long-term loans also increased.

As in other North African markets, Islamic banking is beginning to make an impression. Al Baraka Bank Algeria, which is a subsidiary of Bahrain-based Al Baraka Banking Group, increased its net income by 18% last year, with a 14% rise in customer deposits on the back of the expansion of its branch network and a 9% jump in assets.

However, the impact on net operating income was more modest, with a 3% increase to $77.5m. Under its five year plan, the bank increased its branch network from 21 last year to 25 now, with a total of 50 expected by 201. In addition, it has begun to offer insurance for the first time and hopes to introduce online banking in the near future. Al Baraka is already present in Tunisia and Egypt, and is currently setting up operations in Libya.

Adnan Ahmed Yousif, the chairman of Al Baraka Bank Algeria and the chief executive of Al Baraka Banking Group, said: “The bank’s performance in 2011 … is a proof that the bank is well established in the Algerian market. The bank was able to build upon the strong financial resources that it possesses and also benefit from the strong support that the parent company extends to its subsidiary banks to expand its branch network, enhance its human resources and diversify the services and products that it offers. These steps enabled the bank to make the most of the opportunities available in the promising Algerian market.”