OBG talks to Hisham Ezz Al Arab, Chairman and Managing Director, Commercial International Bank

Interview: Hisham Ezz Al Arab

What sort of medium- and long-term fall out do you expect from market instability?

HISHAM EZZ AL ARAB: The year 2011 was a good crisis management test for Egyptian banks. In terms of everything from safety, security, re-opening of branches and rebuilding it was a real endeavour. Managing balance sheets while things were shut down was also a challenge. The revolution put risk models to the test.

Moreover, the economic ramifications of the revolution have significantly reduced the pace of economic expansion, where GDP growth has slowed to about 2%. As time passes, my optimism of a recovery grows stronger. With a democratically elected president and a cabinet of technocrats, I am confident that we are on the right track to start reaping the benefits of the revolution, as opposed to our prevailing fixation on all the negative aspects change ultimately brings.

What further changes in the regulatory framework might spur increased growth in the sector?

EZZ AL ARAB: The central bank has made many positive changes over the last few years, but there are certain things in the banking law that need to change, such as increasing capital requirements. The current capital requirement is about $80m, which is far below what is required by most bank regulators in the region.

When a bank’s capital is $80m it is difficult to make the necessary investments for upgrading technology and services. That is why I believe the minimum requirement should be $500m. People who invest that amount in a bank are people serious about the domestic economy. The higher the capitalisation of financial institutions the more discipline they will have. This will be a positive move towards healthy consolidation.

How do you think the sovereign downgrade will affect the banking sector?

EZZ AL ARAB: The rating agencies use their own models, but that model failed several times in the past with companies or countries with top-notch credit ratings. When you apply that model to companies like Lehman Brothers, Northern Rock, RBS, Citi, or to a country like Iceland, you see instances where a high rating quickly takes a nose dive – in some of these cases, equity was almost wiped out completely. I believe ratings models have to be revised to integrate internal processes, asset quality, capitalisation and liquidity, and must consider how large an impact the institution can withstand.

Over the course of the last 100 years, Egypt has endured three wars, the nationalisation process and many other trials. Even under these circumstances, not once has a financial institution in the country failed to pay its liabilities. Again I have to question the model that led to Egypt’s sovereign and bank downgrades.

From what areas do you see the potential for sources of future economic growth?

EZZ AL ARAB: I believe corporate business will return and have a very healthy 2012 in green fields. In 2013, once employment begins to pick up, we will start to see the impact of corporate growth that will have an effect on consumer banking. Consequently, it will give a good kick to middle- and upper-class housing demand, allowing the sector to grow and develop in new ways.

I am not worried about lower income housing because there will always be demand for that. Just having a president and a functioning government is a huge step in the right direction for restarting the economy.

What impact would the devaluation of the Egyptian pound have on future investments?

EZZ AL ARAB: People always look at currency devaluation from the negative side. This will not have a strong negative impact as long as it is an orderly devaluation. Every country in the world wants to devalue their currency – China can be used as a good example. The Japanese, for instance, will be in a bad economic situation for many years because a strong currency erodes the country’s competitiveness. As long as there is still a functioning exchange market Egypt will be just fine.