CAIRO: It has been hard to miss the deluge of lending-related “gloom and “woe that has overrun headlines this past year. Unless, that is, you’ve stuck to the Middle East, where realty and mortgage markets are enjoying an unprecedented boom.
Many of the systems blamed for turmoil in the West, notably those involving risk management, are still young here. Bankers are looking to learn and profit from the gaffes and triumphs of their Western counterparts.
With a risk management program just under two years old, Ahli United Bank is one example of the trend. When Ahli United Bank Group bought out Delta International Bank in August 2006, the new group made setting up a risk program one of their main priorities, said Shafqat Anwar, the bank’s deputy CEO and chief general manager of finance, risk and operations.
The risk field in Egypt has shifted a lot in the last decade, Anwar said, largely keeping in line with shifting global attitudes.
“Banks traditionally used to view risk as only a credit or lending-related matter and the credit or credit administration department used to perform the risk functions of a bank in the traditional sense, he said. “However, with the modern approach of risk management, operational and market risks are also important.
The industry is also moving toward risk-based auditing, he said, rather than the usual models of “fault finding auditing, thus changing how banks identify, control and fix problems with borrowers.
So as this growth continues, what lessons can be learned from the shambles to the West? According to Theo Vermaelen, program director of the Amsterdam Institute of Finance and professor of corporate finance at the elite business school INSEAD, it is a lesson often heard, but not always heeded: Educate.
Vermaelen, who was visiting Egypt to run a training program at Citadel Capital, said there were three prime causes behind the lending disaster: Risk managers were not respected enough in their institutions; they were often too specialized to see the greater picture; and their educations emphasized mathematics and model-building, leading them to overlook broader strategies.
Often only a few of those along the mortgage supply chain could actually sort through tangles and webs of the investments that they were buying – or, nearly as often, the actual investments they were selling, he said.
Many banks were acting as if they would not have even considered risk if it were not for state regulations, Vermaelen said. Advertising, like Citicorp’s five-year “Live Richly campaign, pushed customers to invest beyond their means. The longer-term danger of such lending was ignored because a bank could simply “push the hot potato to someone else, Vermaelen said.
The failures of the banking system there show that “soft variables like reputation can no longer be ignored, he said.
“The whole banking system is based on trust, Vermaelen said. “What happens when customers don’t trust you?
According to most analysts, an obsession with short-term gains was rife in the days leading up to the collapse, as buyers were spurred by the dream of owning a home whose value they were told would appreciate indefinitely, and sellers by the lure of fast, loosely-regulated cash.
Now regulation alone won’t be enough to right the system, Vermaelen said.
In the European Union, a variety of rules have been proposed, including one that would make banks hold on to a stake of the assets they sell, and another that would enforce a system of “investor selection, whereby financial instruments could not be sold to those who do not understand them.
But this type of rule is difficult to uphold in practice, Vermaelen said.
Instead, he suggested, a more fundamental change is needed in the attitudes of banks and the way decision-makers are compensated. Education is key, he said. And, as business schools sprout up in Dubai and executive training programs appear in Egypt, it appears there is at least a demand here.
“The situation in Egypt is different from the current credit crisis experienced by the US and Europe, said Anwar. Still, he adds, there are lessons to be learned.
The Central Bank of Egypt has done well by putting in place some regulations and restrictions, particularly on lending within the real estate sector, he said, adding that his firm is also trying to make sure that lending clients are drawn from a variety of business segments, so as to avoid a crisis like those afflicting foreign markets.
Not all rules apply to Egypt and the rest of the region. In Abu Dhabi, Vermaelen noticed a difference in the way people approach risk compared with the West. Many banks declined to thoroughly check borrowers’ reliability, largely because they were related or familiar with the lender. The social costs of defaulting on a loan are much higher in such a state than in a relatively anonymous Western market.
“I think this is a weakness of the Western system, Vermaelen said. “There are other things than money that can tie you to a corporation.
To read the other stories in our monthly special focus on Egypt s banking sector, click here:
http://www.thedailynewsegypt.com/article.aspx?ArticleID=16040
http://www.thedailynewsegypt.com/article.aspx?ArticleID=16041
http://www.thedailynewsegypt.com/article.aspx?ArticleID=16043
