Public banks came under the spotlight these past two weeks as strikes caused the closure of the entire banking sector, in turn keeping trading on the stock market suspended and bringing the financial sector to a standstill.
As bank employees protest demanding wage parity, the Central Bank of Egypt faces a dilemma, that of addressing wage disparities within the banking sector — a problem that is prevalent in most other sectors as well.
After deciding to close banks for a week, the CBE asked strikers to form groups that would present their demands to authorities, and banks opened their doors again on Feb. 20.
Experts say that any kind of salary scheme restructuring need to come in the framework of broader long-term reforms. Others say the CBE may not be able to undertake these reforms during the current turbulent times.
Employees are demanding more equitable salaries with top level management, denouncing the significant disparity in wages. Meanwhile top executives justify their salaries by pointing to reforms they have overseen at these banks, which have led to higher profits and an overall improvement in financial results.
But according to workers’ grievances, these results have not translated into wide scale benefits for all employees. The argument is often made especially that since these are public banks, pay scales should be less disproportionate.
Monal Abdel Baki, banking expert and assistant professor of economics at the American University in Cairo, spoke about top executive and managerial remuneration, pointing out that this applied to both private and public banks.
Firstly, in economic systems that do not follow a highly progressive income tax mechanism, such as the cases of Scandinavian countries and France, income gaps lead to poor income distribution and a rise in social tension. Aside from causing societal imbalances and socioeconomic unrest, any gaping wage disparity also results in lower productivity levels among employees, she said.
Since the pay of top managers in most countries rises in accordance with the growth of bank profits, she said, these managers are sometimes engaged in risky operations as a means of enhancing bonuses.
“This is detrimental for both the banking institution as well as for the economy at large. For the bank, holding highly risky assets exposes it to the possibilities of losses and/or non-performing loans (which in Egypt currently account for 14.7 percent of GDP as per IMF statistics),” she said.
According to Abdel Baki, banks across the board engaging in such activities expose the entire financial sector to systemic risks.
Examples of this abounded during the global financial crisis, the Asian Crisis of 1997 and the Mexican Tequila Crisis of 1994. It is for this very reason that central banks and regulatory bodies around the world are currently revising the huge pay gap and executive remuneration.
Egypt’s banking sector is on its way to adopting Basel III, a set of regulatory procedures that banks were supposed to start phasing in this year and through January 2019.
“One of the most important issues included in Basel III is limiting bank executive remuneration, regardless of the type of ownership of the bank,” she added.
There is another view that argues that now is not the time for these protests.
Essam El-Mallakh, chairman of banking think tank Lafferty Egypt, said that these protests are not justified because employees have accepted these salaries and any increases which may have occurred based on their contracts.
“If this was any private sector job with a set salary that both employer and employee have agreed upon, would these protests be justified?” he asked, adding that the management of these banks has been able to drastically increase profits and, in turn, relatively raise salaries.
In his view, “the protests are only justified if the protesters are able to prove that there is corruption or fraud taking place or that they feel top management are not doing their jobs, but the salary structures in these banks are much better than in any other area in the public sector.”
According to Lafferty, if employees seek higher wages, they should seek alternative employment in better paying banks or wait until the situation improves. Striking during this delicate period has a negative effect on the banking sector and delays banks from resuming normal operations, he said.
Strictly financial
Looking at the financial results of public sector banks, a marked improvement is obvious — the argument used for the current management which oversaw reforms. Still, specific salary structures are difficult to assess.
Under the leadership of the CBE, El-Mallakh said that public banks are doing exceptionally well in terms of ratios and profits, citing the National Bank of Egypt (NBE) as a prime example.
Tarek Amer, chairman of the National Bank of Egypt, was prompted to resign after employees protested, but his resignation was rejected by the CBE. Amer came on board in April 2008 to lead the reform program for the biggest bank in Egypt.
The NBE said that its net profits reached LE 1.013 billion for the first half of fiscal year 2009/10, a 76 percent increase (LE 438 million), over the previous year.
In terms of other indicators such as return on equity (ROE), the bank more than doubled its performance from 10.3 percent to 22.1 percent. According to a statement, this “makes NBE one of the fastest growing banks in terms of ROE in the region.”
Its net interest income indicator showed that the bank grew by 64 percent, which is significantly higher than the 21 percent in the previous fiscal year, bringing the total to LE 2.2 billion — or an increase of LE 856 million.
Pertaining to operating income, it expanded by 66 percent, putting the total at LE 3.4 billion, and the bank’s total assets reached LE 271 billion at the end of 2009, which represents a 5 percent growth rate.
Mohamed Kafafi, vice chairman and CEO of state-owned Banque Du Caire, previously told Daily News Egypt that the banks’ management, which took over in 2008, has increased its portfolio from LE 5.7 billion in 2008 to LE 14 billion last year.
Kafafi spoke of an ambitious plan to grow the bank’s programs and portfolio as a whole by an average of 15 to 20 percent a year.
Also under new management, Banque Misr had undergone a comprehensive strategic restructuring program to introduce new lines of business and to upgrade and centralize the operations, introducing new technologies and training programs to improve performance, expand banking infrastructure, develop new products, and increase shareholder profits.
According to the bank’s website, during fiscal year 2009/10, the bank managed to achieve positive performance indicators. Total assets in June 2010 recorded LE 299 billion, growing 15.3 percent from June 2009. Total deposits reached LE 245 billion, increasing by 11.8 percent compared to the previous year.
Immediate reforms
Abdel Baki listed several changes that need to be undertaken immediately by the CBE, adding that “bridging the pay gap should not be limited to state-owned banks, but must also apply to all 39 banks that are currently operating in Egypt.”
It’s time that the banking sector have a specific corporate governance law, as opposed to a “loose set of ambiguous and generic CG codes,” she said.
While the bank reform plan enacted since 2004 is “quite commendable,” with the lack of internal governance procedures, these reforms are “apt to fail in the future if the CBE governance becomes lenient.”
“Everyone knows that it does not suffice to have central bank regulation and external auditors, but internal governance will strike a balance between adequate risk exposure, acceptable levels of profitability and the buildup of a highly motivated staff and employees,” she added.
Most importantly, she said, it is vital that the board of directors of the CBE be “devoid of commercial bankers, investment bankers or regulators from other sister regulatory bodies (such as the Egyptian Financial Supervision Authority),” citing a conflict of interest in the current board.
“It is true that all the current members of the BOD of the CBE are distinguished and trustworthy financial specialists, but this may not be the case in the future. …There has to be a total separation between the regulatory body (CBE) and the institutions that they regulate.”
When posing this demand to authorities, she said the reply they received in the past was that other developed banking sectors have bankers sitting on their board.
“However, this is a new revolution with a set of new Egyptian-made norms, which will no longer copy from other systems, especially ones out of which the global financial crisis was born,” she added.
