Reforms of Egyptian Banking Sector Now Serve As A Case Study — ABC Egypt

Interview with Akram Tinawi, CEO and MD of Arab Banking Corporation (ABC) Egypt

Could you talk about the banking sector in Egypt, the dry spell and its effects?

Egypt has had a very dry spell for about 4 years. Foreign Direct Investment has shrunk and reserves have depleted. In 2010, we had $36 billion in reserves. Today it has shrunk to $15 billion. Without aid from the Gulf, these reserves would have been wiped out. We had been reforming the banking sector from 2003 to 2010. These reforms saved the banking sector in Egypt during the dry years. It was very difficult to manage our reserves in the past few years. The performance of the Egyptian banking sector, its survival and its role as the backbone of the economy in those tough years, has now become a case study in the best universities in the world.  

Can you please explain that phenomenon? How and why did the Egyptian banking sector survive and develop in such a harsh environment?

Managing the reserves was itself a tough job. There were tough decisions to be made in terms of assigning priorities in imports. We had to differentiate between necessities and luxuries. The tough decisions were a must. Look at the situation now. The parallel market has almost disappeared. At one point, the difference between the official exchange rate and the black market rate was almost 8 to 10%. We couldn’t afford to have two exchange rates.

The Governor of the Central Bank took some tough measures to terminate the black market and he was successful. Those measures were instrumental in saving the economy. A country like Egypt cannot afford to be importing at the rate of $60 billion a year. Only $30 billion of the imports are moving through the banking sector, the other half was moving through the black market. No economy in the world has witnessed such a thing. It was high time the unofficial market was controlled and the money channeled back to the banking sector. Let me give you an example. The foreign remittances from Egyptian workers abroad is in the vicinity of $19 billion. Only about $2 billion of that money was going through the banking sector. The big balance, $17 billion was going through the black market. This was unacceptable. Most of this money comes from Egyptian workers in the Arab countries. The Arab countries themselves are helping us with petroleum subsidies and direct funding etc. However, the Egyptians working there are selling their dollars at a premium on the black market, instead of supporting the economy. Dollar inflow into the banking sector, particularly in the public sector which mainly receives the worker remittances, has shot up by almost 10% since the new directives of the Central Bank.

What is your assessment of the market now, and of the banking sector itself?

Before I speak about the banking sector itself, I’d like to talk about the big picture. There is a new economic roadmap for Egypt after the Sharm El Sheikh Economic Forum in March 2015. I had the privilege of being one of the ambassadors of the Forum. The contracts signed there are worth nearly $36 billion, primarily in the power sector and in oil and gas. A new capital city will be built east of Cairo. This project will involve about $45 billion in investments. The new city will be home to 5 million people. There will be a lot of construction, about 1.1 million new commercial and residential buildings will be built there. There will be a new airport, new government buildings, probably a new presidential palace. It’s a mega project. It will provide lots of new job, thus reducing our unemployment rate. The oil & gas and power industries are not that labor intensive. Construction requires lots of manpower. There will be a bright future for skilled craftsmen. This will also encourage new trade schools, to prepare more future craftsmen, who will fulfil the demand. Egypt is not badly in need of more doctors, but we are badly in need of more people with technical skills. In Japan and the Far East, people with such skills have a lot of respect. Tradespeople like plumbers etc. will be the need in Egypt in the coming years.

Egypt is now on the runway in terms of economic growth. Moody’s has just upgraded Egypt to a B3 rating. This is a vote of confidence from a world rating agency. There were a lot of global business people at the economic forum. In my opinion, the success of the Forum is in the mix of countries that attended and the sectors that got a boost. We don’t need a forum to bring in business and donations from Arab countries. The success of the Forum consists of the businesses from the US, Europe, Russia, China and the Far East showing interest in investing in Egypt. The Prime Minister of Italy spoke there, as did the Tourism Minister of Spain and the CEOs of companies like Siemens, GM, GE, BP etc. The businessmen, the CEOs showing interest, are far more important. Some of them are more enthusiastic than any Egyptian in selling the country. This Forum was meant to sell Egypt to investors. The investors who came were already sold on Egypt.

Regarding the investments promised at the Forum, some were realistic but some seemed less realistic.

The whole number discussed was a growth of about $185 billion. That is the best case scenario. The worst case scenario? We have $36 billion in signed contracts, primarily in the power and oil & gas sectors. In addition we have $12.5 billion coming from GCC countries, of which $6 billion are direct investment and another $6 billion in petroleum products. These are the guaranteed ones. That is a total of $48 billion in guaranteed contracts, subsidies etc. Before the economic forum, the best estimates for investments were at about $15 billion. Now we have a guaranteed inflow that is 3 times those estimates.

 Then we have the MOUs (Memorandum of Understanding) that have been signed. These are at about $70 billion to $80 billion. If we assume a 50% success ratio on those, we have really moved this country to another level. Egypt is ready for takeoff. Egypt has gained the respect of many big businesses and they recognize that the climate in Egypt is ripe for investments. Those who invest now, invest at a discount. Those who wait a bit, will invest at par. Those who wait longer, will have to invest at a premium.

Egyptians have a great opportunity now to reap the confidence shown by the delegates who attended the conference. The ball is now in our court. As the President said, the time for celebrating the unexpected success of the Forum is past. Now we need to work and produce. We have no other option. Egyptians have to understand that time is no longer a luxury and failure is not an option.

Could you speak specifically about the banking sector in Egypt? What is your role there?

The banking sector is one of the best maintained and strongest sectors in Egypt. This has been proven. They have been the backbone of the economy, even in the dry spell. For 4 years the banking sector has financed the budget deficit of the country. We did make a lot of money, but this is not really our job. Banks are primarily there to lend, invest and participate in projects. We have not been following this prime mandate for the last 4 years. Our profits have been very good. It is often said that when the economy is in a slump, the banking sector makes millions in profits. The country had a big deficit and we had to play the role of backbone, in spite of our primary mandate.
Going forward, our role in the economy will change once again. The banking sector has an excess liquidity of above $600 billion. The loan to deposit ratio is around 42%, which is one of the lowest in the region. That tells you how high the liquidity of the banking sector is. This liquidity has to be invested in projects. In the economic trajectory of the country, the banking sector is the least of our worries. We have the best talent and the best brains. For 4 years we were in starvation mode for finance, because of the instability and a lack of vision. Now things are different. Now there is an investment map for Egypt and investments are coming in. I think the banking sector will see a different kind of boom in the coming years. We will be involved in the mega projects. Banks have a strong capital base, strong liquidity and the expertise required to finance the projects in the pipeline.

We interviewed ABC chiefs in Bahrain and Jordan. Can you talk about ABC Egypt?

Let me talk about how it all started. I am told I’m one of the youngest CEOs in the banking sector. I had 22 years of experience in multinational banks when I joined ABC. I had worked with bank of America, Citicorp, Barclay’s etc. I joined ABC at a very crucial and critical time. This was in November 2010. Two months later the Revolution happened. People thought I was unlucky to have taken over at such an unstable time, when many people thought there was no future for Egypt. No one could tell then what direction the country would take. Many thought it would be hard for me to run a bank at such a time, to put a strategy in place. I decided that what we needed first was a crisis management strategy, because that was the need of the hour.

There was a lot of doubt, even from those who reported directly to me. I told them to look at the thousands of people in Tahrir Square every day. I asked them who they thought was making big money from the events surrounding the Revolution. Most of them thought it was the small vendors selling tea, coffee and snacks to the crowds in the square. But I pointed out that the businesses profiting most from the events were the businesses making Egyptian flags. Each person going to the square was buying at least 3 flags, one to hang in the balcony, one for the car and one to carry into Tahrir Square. The most important fact was that nobody was bargaining over the price of the flag. Those flag making businesses made money out of the crisis. So I said that ABC Egypt should sell Egyptian flags. Many people didn’t get it.

When I joined ABC, it was making about EP22 million from 28 branches. We’re neither big nor small, we’re a medium size bank. I told my people that EP22 million was like the profitability of just 2 corporate accounts. I told them that it was time we proved to our parent company that we can deliver. People looked at me like I was an alien from another planet. They thought I didn’t get it. The economy was not moving. How could we deliver? However, in 3 years’ time, we took it from EP22 million to EP100 million. We were the fastest growing bank in the country. I’ve built what I like to call the ‘Harlem Team’. I was very careful and selective. I took my time selecting and building my crew. I owe all our achievements to this team. I’m the Coach, I’m outside the track, while they are playing in the field.

Where did this team come from?

They came from the same background as me, multinational banks.

What is the secret of your success? Was it just that the banking sector was doing well? Or was it a special strategy or a special service or product that you offered?

It was a mix of many things. I was aiming to get at the low hanging fruit. We started with the bad loans. Usually you start by cutting expenses. I decided to rationalize expenses. I did not want to cut expenses related to staff and clients. At a time when banks were cutting costs primarily by slashing training budgets, I invested in training. I realized that investment in my people would pay off in the coming years. I transformed the legal department into a money making department. I wanted to clear all the cases we had in court. I gave them incentives. The legal department changed from a support function to a front office, money generating function.

The CFO of the bank told me that my predecessor had sold a lot of auto loans to the tourism sector. At this point the tourism sector was hit very badly, it was dying. The CFO said it amounted to about EP20 million. That was a huge chunk of the EP22 million profits we were making then. I asked about who had sold all these loans and I was informed that it was the 80 person Direct Sales team. This was the first bit of turbulence since my takeoff, but I had EP20 million at risk. I gathered the Direct Sales team in the boardroom. I told them how badly their auto loans had affected the bank. I announced that I would close down the product and most of them would probably have no job to come back to. It was a difficult time to find new jobs because there were hiring freezes all around. I could see the fear in their eyes. I told them I would give them one chance to survive. I said they must collect on all the loans they had sold. I transformed the sales team into a collection team. I can tell you the expected provision of EP20 million, went down to EP12 million, then EP8 million, then EP4 million. This was the first time bomb thrown in my lap. We’ve done a great job since then on recovery.

I then started to focus on widening the bank’s deposit base. At that time there was no active investing. We had to invest in treasury bills and treasury bonds. Those had a high yield then. It helped us generate a lot of profits. I was very careful on expenses and provisions. We did a massive cleanup of the old portfolio. We started re-furbishing the house. We started to selectively recruit the team. We cherry picked the best fit for every department. Now I can report that my direct reports in senior management all speak the same language. I wanted to have a new strategy for the bank and I wanted everyone in the bank, including the tea boy and my driver, to be aware of it. Everybody is invited to the party, there is no back and front end. We all serve the customer. I announced that I wanted the bank to be the best it could be, at 100/100. Everyone in the bank agreed they wanted it that way too. It’s a simple expression to remember, full marks, 100/100. What I meant was for us to have 100,000 customers and 100 million in profits. I wanted to simplify it and get everyone engaged in the strategy. I wanted to make it simple, manageable and doable. We have reached the first milestone, which is the profits. The current challenge is the second part, to increase the customer base.

We are aggressively building the customer base. We give our customers a boutique service. We have very strong ties with our customers. We think long-term regarding our customers, we don’t think of just making a buck today. We are building a bank. For the ABC group, Egypt is their black horse, in terms of performance and the skilled, talented personnel. I export talent to the region. Most important for ABC is the potential for growth in Egypt.

Where do you think your bank’s strengths lie? What is your competitive advantage?

Sometimes when you are quite small, you can be very selective about which niche you want to occupy. As a group we have a strong reputation as a regional bank in the trade and finance areas. Egypt is embarking on a new era of trade, within the region and other parts of the world. If you plot our group on the map of the world, you we will see that we have a presence in the US, we have a massive presence in Europe, we are in the Middle East and we are in Brazil. We are on the brink of a new expansion in the Far East. We have a presence in all the trade hubs of the world. My counterparts in these different regions and I have a very close relationship. Our customer databases are also very good. We plot the two parties in every trade transaction and we leverage on our presence and our expertise. That is our strength from a trade and finance perspective.

As for corporate lending, if you look at our books, you will see it is almost doubling every 18 months. It is a reflection of our appetite for financing projects and for corporate clients in the country. We expect it to expand, going forward. On the retail side, our deposit base has grown 45% in 3 years. We had 22,000 customers. Today we have more than 60,000 customers. We are very active in retail banking and we want to use our branches in the best possible way. Earlier, of the 28 branches, only 10 were profitable. Today, all our branches are profitable, except for the 3 branches in the Sinai, for obvious reasons (tourism). The quality of service a customer gets at these branches is one of the best in the market. We are launching a program called the Affluent Proposition for high net worth individuals. We are known for being quite aggressive in terms of plans and growth. You can sense it among our staff. We are quite visible in the banking sector, despite our size. We are known as the dark horse of the market because of our growth in a period when the country was really dry and there were no venues for investment. We are ready for the next step. I am keeping a very close eye on our push to reach 100.000 customers. That’s my dream for the short term. I foresee that in about 3 years we will achieve about EP200 million in profits.

That’s an ambitious plan.

It’s an aggressive plan, yes. But I’m a great believer in the idea that you must shoot for Mars to land on the moon.

Tell us your plans for corporate banking. Do you want to specialize in SMEs? Which sectors do you want to focus on?

We are focusing on those sectors that are strategic for Egypt. We are focusing on oil and gas, strategic foodstuffs like wheat and sugar, the pharmaceutical sector. We’re also focusing on the building materials sector, the services sector and the export sector. We’re focusing on everything that is crucial to the economy. We are aggressively thinking of the SME sector. I’ve done it before, in a previous life. We are thinking of supplier chain finance where we have a large corporate customer and we show interest in being bankers to their top suppliers and top distributors. That’s how you close a chain. This is a segment that isn’t taken seriously by the banking sector. We talk a lot about SMEs in Egypt. About 90% of the companies in Egypt are SMEs. The private sector is 70% SMEs. However, their contribution to the GDP is only 50%. There is high potential for development.

ABC is an international group. What can ABC Egypt offer in terms of exposure or international help, being part of such a network?

We have on the ground experience of this. Many of our customers use our branches in markets that are new to them, abroad. I mean in such countries as Algeria and Libya. We were like an ambassador for our clients, to introduce them to their new market. Even in Europe we use our network effectively and efficiently. That’s a focal point for us. We leverage the quality of our people and our presence in these markets on behalf of our customers. We serve customers who are exporting to these markets as well as those investing in these markets. In the GCC area, we have great coverage, because Bahrain is our center. We help our Egyptian customers in all these countries. We have a regional flavor in our approach to our customers. In Egypt, we are one of the 39 banks in the country. But our regional strength puts us in a niche occupied by very few banks in Egypt.

What would be your message to interested yet hesitant foreign investors, who are still not sure about entering the Egyptian market? Outsiders still are not sure if Egypt is stable.

I can tell international investors that this is a very opportune time to come invest in Egypt. The country is ready for foreign direct investments. The Egyptian government and the banking sector here are aware that investors had concerns earlier. The government, the Central Bank and all other concerned bodies have been working very hard to address these issues, with reforms, new investment laws, taxation laws, a fixed exchange rate and legislation. Most of the concerns investors may have had about coming to Egypt have been fixed before the Economic Forum. Security in Egypt has come a long way. There may be the fear of a bomb here or there, but it has diminished and soon it will vanish. It’s a matter of time. An investor is looking to the future, a long term trajectory. By the time their firms are established, the security issue will be resolved. Come and enjoy a fertile investment environment at a discount. If you wait, you will pay a higher premium.