Sherif Samy, Chairman, Egyptian Financial Supervisory Authority (EFSA): Interview

Interview: Sherif Samy

What measures can encourage new listings on the main board and the Nilex?

SHERIF SAMY: I strongly believe that we have all of the positive regulations in place to encourage new listings; the challenge now is solely the economic environment. There is not so much of a problem with the listing laws, disclosures or minimum capitalisation. Rather, the issue lies in how the international and domestic climate is impacting decision-makers. Being an emerging market, we rely heavily on the flow of foreign funds which, globally, have been heavily affected in past years. We witnessed a flow of capital out of emerging markets, which we have not seen since 2008. Other factors, such as the geopolitical situation in our region and the concerns about the exchange rate, create a very uncertain environment for investing in capital markets.

Now that Egypt took the decision to float its currency, we are seeing renewed interest and a stronger appetite. Daily trading has more than doubled on the stock exchange and new foreign institutions and funds are investing in it. There are also several large state-owned banks and companies planned to be listed during 2017.

In 2015 we experienced the largest number of initial public offerings (IPOs) in five years. This is a good sign and demonstrates that interest is being regenerated. The momentum continued in 2016. As a regulator, we focus on having secure, blue-chip companies, which are appealing and with reasonable liquidity, so future IPOs, whether they are private, state-owned or anything in-between, are positive for the market.

However, state-owned entities must take into consideration governance issues and separate ownership from management. Real institutional investors value arms-length, independent governance, and will be sceptical about investing if these rules are not made clear. The law mandates a minimum corporate governance and disclosure, but some companies are more distinguished than others and go out of their way to communicate top-tier corporate governance. This cannot be mandated in the law, but it does make these companies and the bourse more attractive to investors.

What kind of new investment tools could help deepen Egypt’s capital markets?

SAMY: We are equity dominated and were happy to see exchange-traded funds introduced. So far, we only have one but as market liquidity picks up we will have others. Being equity dominated, we hope to have more fixed income being traded, which is challenging because we are dominated by government bonds and treasury bills. We have revamped the regulations for real estate investment trusts and, given the boom in the real estate market, there is much scope for growth in these trusts. We have also introduced other instruments which have the potential to drive government and quasi-government finances away from the state budget. Here, we have reformed regulations for revenue bonds, which are similar to municipal bonds in the US, to raise finances for specific projects. We have yet to see them being used, but they can leverage leasing, factoring and even mortgages in government projects. Ultimately, there needs to be more knowledge about these instruments and their financial benefits over a reliance solely on traditional bank financing.

To what extent will the EFSA’s proposed Movable Guarantees Law improve access to credit for small and medium-sized enterprises (SMEs)?

SAMY: We assume the proposed law will improve our previous system of guarantees, as it is not based on the physical possession of assets. Through this we have assumed international experience by lowering the risk for lending and creating a larger bankable population. The golden rule is when you reduce risk, you also reduce costs. The cost of funding runs parallel to higher risk, so our objective was to facilitate lending and financing predominately to SMEs and individuals through microfinancing by introducing an online register, backed by law.