Egyptian businessperson Naguib Sawiris expressed his desire to obtain a license to establish a private bank, specialised in financing small projects in Egypt, but he has not presented an official request to the Central Bank of Egypt yet.
Sawiris’ desire to set up a bank brought to mind the idea of family banks and Egypt’s suffering from this type of banking for decades, until they were merged into other banks.
According to Law No. 88 of 2003 regulating banking, any natural or legal person shall not own more than 10% of the issued capital of any bank or any share that allows controlling the bank, unless the board of directors of the CBE approves the move within specific control measures.
European Renaissance began and spread through private and family companies
The history of economy shows that the European Renaissance began and spread through the spread of private and family companies that were inherited from one family generation to another, according to former CBE governor Mahmoud Abu Al-Oyoun,
He added that family businesses play a significant role in world economies in many countries. According to Forbes, family businesses and activities contribute to more than 50% of the gross domestic product (GDP) of the United States of America.
Abu Al-Oyoun pointed out that a company should not necessarily be described as a family company if it was launched by an individual, as was the case in Europe and many Arab Gulf countries. He noted that anyone can acquire the majority of shares in an existing company and a number of family members are entitled to inherit the shares after the death of the original owner.
Within that system, the founder of any company is its managing owner. If they succeed in developing the company, their children and spouse may start helping them run it, but they still have the absolute power in management and decision-making. One of the family members may have a significant ability to manage the company. In this case, the founder may begin to trust them, give freedom to make some comapny decisions, according to Abu Al-Oyoun.
He added that after the death of the founder or their inability to manage the company, one of their heirs is usually chosen to operate and manage it. Thus, the continuation of a family company is linked to the level of trust between the heirs.
But will the management of family businesses continue in this same manner?
Abu Al-Oyoun said we should differentiate between three cases. First, the continuation of the owner/manager position which may prevent companies from growing. Second, the case where the owner hires specialists to operate the company, while retaining full decision-making power. Third, is the case where there is a complete split between ownership and management, described as ‘corporate governance in family businesses’; it is the most successful family business type and the most influential in world economies.
In this case, family ownership is often transformed into a holding company (a company that controls another company or group of companies by acquiring majorities of shares). Holding companies are responsible for developing the operation strategies of their subsidiaries and setting specific objectives that the independent departments of these subsidiaries should achieve, according to Abu Al-Oyoun.
He pointed out that there are 20m registered family companies in the United States. In Italy, 95% ofcompanies are registered as family companies, Britain 75%, Spain 80%, and 70% in Portugal. In the Arab Gulf, family businesses represent about 95% of companies there.
The majority of the world’s major banks started as family businesses. Can this be applied to banks in Egypt?
Abu Al-Oyoun said that most major banks are family businesses, such as First Bank in the United States, which was founded near St. Louis, Missouri in 1906, C. Hoare & Co. Bank, Santander Bank of Spain, Banco Espirito Santo of Portugal, Berenberg Bank in Germany, and East Asia Bank in Hong Kong.
Can families own banks in Egypt?
It is difficult to have family banks in Egypt, except by acquiring majority stakes in existing banks through financial institutions owned by families and after the approval of the CBE in accordance with banking laws. Any natural or legal person must obtain the CBE’s approval to acquire more than a 10% stake in a company. Such financial institutions wishing to enter the Egyptian market should have good financial history and clear plans to work in the market so that they can compete with others.
He added that it is also difficult to establish new banks in Egypt, since Egypt has signed the General Agreement on Trade in Services (GATS) that stipulates that economic necessity is the basic rule for granting new licenses for banks wishing to enter the Egyptian market.
The only way that allows family banks to enter the market is to own a majority stake in international banks licensed to operate in Egypt and registered by the CBE.
What are Egypt’s concerns over individual or family ownership of banks?
Abu Al-Oyoun believes that there is no need for these concerns because the CBE’s supervisory authority is strong and can impose strong and precautionary control measures over licensed banks. Moreover, there are rules of governance for banks to separate management from ownership. In this case, management authority lies in the hands of the bank’s CEO or managing director, who becomes in charge of maintaining the bank’s success and reputation, and preventing any intervention from its owners.
Family banking experience in Egypt
What about the previous experiences of family banks in Egypt?
Abu Al-Oyoun said that previous experience of family banking preceded the implementation of Law No. 88 of 2003, which put all the necessary elements of strong control over banks in Egypt, giving the CBE all the power to supervise banks and maintain banking stability.
Without the presence of problems experienced in some small family banks, such as the Nile Bank, we could not establish banks as strong as the current banks operating in Egypt, Abu Al-Oyoun noted.
He added that Egypt learned from its experience in this field and the CBE became one of the strongest central banks in controlling and supervising banks in the world.
Mohamed Abdel-Aal, a member of the board of directors of Suez Canal Bank, said there is no restriction on any Egyptian or foreign citizen to obtain a license to establish a bank in Egypt as long as they meet the necessary conditions.
He pointed out that the most important of these conditions is the existence of technical and administrative expertise required for bank management, the banking sector’s need for new banks, the nature of the bank’s activity for which a license is required, the objectives and strategy of the bank, the structure of management and employees, and financing sources.
This rule disallowing more than 10% ownership of banks was developed by the CBE after the problems faced by family banks in Egypt, such as Nile Bank, Misr Exterior Bank, Al Ahram, and other banks that faced major problems due to the control some specific families had over them, according to Abdel-Aal.
Successful models of family banks in the Arab world
There are major family-run banks that achieved good results, such as Credit Agricole, Al Baraka Bank, Egyptian Gulf Bank, Saudi Al-Ahli Bank, Al-Rajhi Bank, Kuwait National Bank, Mashreq Bank, and Arab Bank.
Abdel Aal said that these banks are controlled by families, however, they have played a big role in the economic development of their countries.
He noted that the CBE has the right to determine if Sawiris should be granted a bank license.
Abdel Aal added that the businessperson has a good reputation and experience, and is able to inject adequate capital into a bank. Moreover, the Egyptian market needs a bank specialised in financing small projects. Sawiris should have the opportunity to establish his own bank, provided that he presents a clear plan to finance small projects.
Abdel-Aal asserted that the bad experience of family banks in Egypt can not be repeated after the banking reform programme carried out by the CBE since 2004, not to mention its strict supervision over banks.
Banking expert Hany Abu Al-Fotouh said that banks are public shareholding companies operating under a disciplined regulatory framework that regulates and supervises their work to protect depositors’ funds. He pointed out that the CBE exercises its regulatory and supervisory authority over all banks regardless of the nature of their ownership or shareholders.
Regarding the concerns over the impact of individual or families’ ownership of bank shares, Abu Al-Fotouh said that there is no specific rule to be applied to banks in all countries due to different legal, regulatory, and business environments, and central banks’ ability to regulate, supervise, and control bank operations, as well as other factors that can affect the performance of a bank and the safety of the banking sector.
Various stages of the banking sector in Egypt since 1952
Egypt experienced several stages of banking since 1952, including the stage of ‘Egyptising’ banks (1952-1960), the nationalisation, integration, and specialisation of banks (1960-1966), the functional specialisation of banks (1967-1973), and the 1974-982 stage that was characterised by the entry of foreign banks into the market, allowing the existence of banks working away from the CBE’s control and regulated by special laws such as the Arab International Bank. In addition, there was the stage of comprehensive banking reform (1990-1995).
He added that the stage of banking reform witnessed multiple disturbances within some banks, that have a number of individuals and families with controlling shares who made decisions to serve their interests and affect other shareholders and depositors in the bank.
Abu Al-Fotouh pointed out that one of the most prominent examples of the negative impact of individual or family ownership of bank shares was Al-Ahram Bank. It used to grant credit without guarantees, causing loss of bank funds. The bank could not provide any profits for its shareholders for four years, before it was sold.
Another example was Misr Exterior Bank, of which the Hawari family owned about 30%. The bank’s former president was accused of agreeing with 81 other bank officials and businesspersons to obtain loans and money worth EGP 100m and $5m from the bank without adequate guarantees. They also established 30 companies, bearing the names of their wives and daughters, to gain control of the bank’s money.
Abu Al-Fotouh pointed out that the owners of these banks were able, through their control of management in these banks, to make credit decisions without abiding by technical rules for the granting of credit as well as the CBE’s controls, which led to huge financial losses.
The CBE has the ability to control the situation
During the period of banking reform, the CBE managed to deal with the problems arising from non-compliance with technical rules and banking controls in granting credit. The CBE imposed reform of management structures on banks, which forced senior businesspeople with shares in banks to quit their membership in boards of directors, according to Abu Al-Fotouh.
He added that CBE also set certain conditions for those owning more than a 10% stake in the capital of any bank, such as clarifying the purpose of the acquisition, the basic activity of the shareholder, the source of their wealth, and benefits the bank will gain as a result of the new owner’s contribution.
Abu Al-Fotouh pointed out that there are successful models of family banks in the Arab world, such as the Arab Bank in Jordan, Al Rajhi Bank, the National Commercial Bank of Saudi Arabia, Mashreq Bank in the UAE, and others.
He noted that the role of national capital owners in contributing to bank capital should not be seen as a threat to the safety of the banking sector or national economy.
The previous period that saw harmful practices caused by shareholders’ control of banks’ boards of directors, due to weak laws and regulations, had ended, so national capital should not be prevented from owning large shares in banks.
According to Abu Al-Fotouh, this can be done through a clear regulatory framework for the bank’s operations and policies, and the application of the rules of banking governance on banks, which ensure accuracy in determining competences, as well as monitoring and performance evaluation.
He stressed that banks’ boards of directors should also be elected by the general assembly of shareholders, with the membership of independent, non-executive persons. The duties and responsibilities of each board member and the executive management should be determined clearly, as well as the powers delegated to executive managements.
Abu Al-Fotouh also stressed the necessity of forming specialised independent committees from the board of directors to assist the board in carrying out its tasks, such as audit, remuneration, nominations, and risk committees.
