Financial Sector Development Policy Loan

closed

The main development objective of the government Financial Sector Reform Program, and of the project, is to build a more competitive financial sector, with a sound banking system and insurance industry, able in the medium-term, to provide modern and efficient financial services. The operation would assist Egypt move forward in strengthening the enabling environment for financial intermediation, resource mobilization and risk management, and for increasing the private sector role in the provision of financial services. The project will support policy reforms in the following three areas: 1) strengthened domestic banking system, inter-alia, by fully divesting public sector bank shares in joint venture banks, privatizing one of the large state-owned commercial banks, defining a framework to implement institutional, operational, and financial restructuring of the remaining public banks, and, consolidating and merging small banks in an over banked market; 2)development of a contractual savings system, and restructured insurance industry, so as to play an effective role in the management and transfer of risk and mobilization of long-term savings; and, 3) strengthened regulatory and supervisory framework for banks and non-bank financial institutions, ensuring compliance with international standards and effective enforcement. However, main risks include a slowdown of the reform momentum thus preventing a genuine change towards market-based, risk-taking business patterns in the public financial institutions. This relates particularly to the government's commitment to, and decisiveness in restructuring the remaining two large public sector banks - and until such time as their capital can be open to private sector entry, instilling the governance, culture and incentives that would weed out past business practices - the government capacity to manage the related fiscal implications, and the ability to build an independent and credible regulatory apparatus.