Capital Market law amendments are positive credit for banks: Moody’s

CAIRO – 19 February 2018: Moody's Investors Service said that law amendments in the Capital Markets Act that the Egyptian parliament voted on last Thursday, is credit positive for banks because the increased capital market activity will raise banks’ income from their debt capital markets business while also providing funding options.

Last Tuesday, the Egyptian parliament passed law amendments to the Capital Markets Act that will deepen the financial markets in Egypt by facilitating sukuk issuance and investors’ ability to hedge, making the country a more appealing investment destination to foreign investors.

“The law’s amendments include the introduction of futures trading, a commodities exchange, allow the establishment of privately owned stock exchanges, and reduce listing fees to 0.005% from 0.002% to encourage smaller companies to list on an exchange,” Moody’s added in a report.

Moody’s clarified that the amendments also facilitate sukuk issuance, set higher penalties for violations of the law and set up a federation for non-banking financial companies similar to the Federation of Egyptian Banks.

The report noted that Egyptian capital markets are underdeveloped relative to other African peers.

“Egypt ranks 14th among the 17 African countries in Barclays Africa Group 2017 Financial Market Index, which uses a variety of parameters, both qualitative and quantitative, to record the openness and attractiveness of countries across the continent to foreign investment,” Moody’s pointed out.

“Although Egypt is the largest Arab country by population, the sukuk market is inactive, something the authorities are aiming to address with the revised law,” the report stated.

The report added that increasing the products offered and investors’ ability to hedge will increase Egypt’s attractiveness to foreign investors, which would provide additional funding options for banks.

Moody’s said that Egyptian banks are financed mainly by deposits, which accounted for 71 percent of non-equity liabilities as of October 2017.

“The income banks earn from their debt capital markets activity will increase, diversifying their operating income, which is heavily reliant on interest income earned from investment in government bonds,” the report clarified.

Moody’s referred to Local SMEs, which account for around 80 percent of GDP and 75 percent of employment; cite a lack of access to credit as a main impediment to their growth.

“Despite the central bank’s initiative, loans to SMEs remain low at around 10 percent of total loans,” according to Moody’s estimates.