Egypt's banks were well insulated from the global financial crisis, but with continuing political instability since the overthrow of former president Hosni Mubarak, many are wondering just how long the country's banks can outpace its slowing economy.
Egypt's transition to democracy is not going particularly smoothly. Since long-time ruler Hosni Mubarak was overthrown in 2011's popular revolution, the country has seen a succession of administrations as the balance of power swung from the armed forces to democratically elected Islamist president Mohammed Morsi and back again after he was removed by the military last July.
The second half of 2013 saw the army-backed government crack down hard on Mr Morsi's supporters, leaving hundreds dead and thousands arrested. At the same time, a fully fledged insurgency began in the north of the country, where militants have killed hundreds of members of the security forces. Meanwhile, terrorist attacks, including car bombings, have spread as far as the capital Cairo.
Foreign investment flows, tourism and consumer confidence are low as a result, while unemployment continues to rise along with government debt and inflation. At least 40% of Egyptians live under the poverty line, according to the UN. The country's economic situation is precarious too; a balance-of-payments crisis has only been avoided thanks to billions of dollars in aid from Gulf countries.
"It's been a crisis management situation since [the global financial crisis in] 2008," says Zeinab Hashim, group head of treasury and foreign division with National Bank of Egypt (NBE), the country's oldest and largest bank.
Egypt is now preparing for presidential elections, which are scheduled for late May. Field Marshal Abdel Fattah al-Sisi, who headed the armed forces that deposed Mr Morsi in 2013 before stepping down earlier this year so he could run for office, is expected to win easily. Mr Sisi has promised better economic management than the last government and many hope he will preside over a return to strong growth after three hard years.
Others, however, see Mr Sisi's rise to power as a return to the problems of the pre-2011 regime. Economists are cautious. The World Bank forecasts 2.2% growth in Egypt's gross domestic product (GDP) in 2014, a marginal improvement from the 2% recorded in 2013, but far from the 5% to 7% growth enjoyed under the final few years of Mr Mubarak's rule.
This turmoil and uncertainty has had an inevitable impact on Egypt's banking industry. A Moody's report in February renewed a negative outlook on the sector due to the unstable political climate and its high exposure to government debt.
Nevertheless, Egypt's banks have proven to be remarkably resilient, partly due to sweeping changes made in 2003 and 2004, which left them well capitalised and with new, internationally experienced management. "The reforms meant that when the global financial crisis began in 2008, Egyptian banks were relatively well insulated," says Barclays Bank Egypt's managing director, Edward Marks. "Balance sheets and loan-to-deposit ratios were all good, we didn't have the problems of the European banks."
Since then, many of the country's financial institutions have posted strong results. NBE, which has a market share of 20% to 27% by assets, loans and deposits, is one of them, Ms Hashim says, adding that whenever there is a crisis in Egypt, the bank's deposit base grows because it is viewed as a safe haven.
Results in adversity
Barclays, meanwhile, which has a head office and main processing centre located about 150 metres from Cairo's iconic Tahrir Square - a focal point for protest and the scene of many violent clashes since 2011 - made its biggest profit after tax for five years in 2013, says Mr Marks, despite having 33 working days when staff could not access the main premises.
At the other end of the scale, Deutsche Bank's representative office in Cairo also had record years in both 2012 and 2013, thanks to the bank's strong transaction services operations, according to country head Ahmed Shehab.
Nevertheless, there is only so long that the sector can outpace the rest of the economy, especially while its customers continue to struggle. "Our biggest challenge is growth because our customers are not growing," says Hisham Ezz Al-Arab, chairman and managing director of Commercial International Bank (CIB), Egypt's largest private sector bank.
Low growth means reduced demand for credit from investors and bank clients, and balance sheets are "ample with liquidity", as a result, says Hamed Hassouna, the chief representative of Union de Banques Arabes et Francaises (UBAF) in the area.
Much of this liquidity is channelled into treasury bills and bonds. Nearly 50% of NBE's portfolio, says Ms Hashim, is made up of government securities. This kind of ratio is not uncommon and, as a result, a common criticism of the Egyptian banking sector is that it over-finances the government and avoids lending to the private sector. Ms Hashim responds, however, that there are few other options for banks. "A lot of our money is in bills and bonds and people ask if it's taking up our liquidity instead of loans," she says. "My answer as a treasurer is no, I only put my surplus funds in bills and bonds."
This, however, is not a desirable or sustainable state of affairs, says Mr Ezz Al-Arab. "I cannot live being a money market fund I make more money in lending to corporates than to the government with corporates, it's not only credit lending, it's trade finance and other things. It's something much bigger."
There are a number of ways for banks to meet this growth challenge and develop lending opportunities, however. One possible avenue is through expansion of mortgage markets, something Egypt essentially lacks, but that many expect would unlock wealth and generate returns both for banks and the construction industry.
Establishing a functioning market is out of the banking industry's hands, however. The chronic issue, Mr Ezz Al-Arab says, is that high levels of bureaucracy mean a mortgage application often takes months to process. "Under the current process of the notary office, you are lucky if it takes you a year. It's not consumer friendly," he says. "The right thing is a maximum of 30 days between applying for a loan and getting your deed and the mortgage finished. The notary office is unfortunately behind the curve in the way they process things. Unless this is addressed and soon, we will not unleash the wealth of this country."
The government does appear to be attempting to simplify the process, adds Mr Ezz Al-Arab, and launched pilot reforms in March on properties sold by the state to low-income segments of the population. The process may be helped along by the fact that current prime minister Ibrahim Mahlab was the minister of housing prior to his appointment and previously chief executive of state-owned construction firm Arab Contractors, so is well acquainted with the issues.
CIB, along with many others in the banking industry, has also been focusing on small and medium-sized enterprises (SMEs), which many see as a major area for growth in the country. It has huge potential, says Barclays' Mr Marks, and is well ingrained from a cultural standpoint. "Egyptians are mercantile in their DNA. This has been a trading nation for millennia."
However, while there are many such businesses in Egypt - 98% of all firms in the country, accounting for more than 50% of its GDP - few develop beyond a certain point.
A question of education
One of the major reasons SMEs fail to grow, Mr Marks says, is a lack of management skills and awareness of modern business practices - such as proper book keeping - among the many often family-owned businesses. "I think it's a question of education and also a transparency issue too: you talk to some of these SMEs and they'll have separate accounts for their partner, their bank manager, the tax man and their wife," he says.
In response, Barclays, along with other parts of the financial sector, is partnering with development agencies to educate small businesses. It has also created a business bank segment - aimed at the small end of the corporate market and genuine SMEs - to sit alongside its corporate and retail arms. Others, such as the European Bank for Reconstruction and Development, which has said private sector development through support for SMEs is a priority in Egypt, are involved too.
At NBE, meanwhile, Ms Hashim describes the SME segment as "where we believe the future is" and says the bank has grown its books there from E5bn ($714m) to E10bn over the past three to four years. She too sees the need for reform, however, especially in the arena of taxation.
The vast majority of SMEs avoid tax collection and remain in the informal economy, but instead should be provided with incentives and help to register. As with mortgage reform though, these changes must be made at a state level. "We will provide the funding [to SMEs] and there's a lot of technical assistance and knowhow we're willing to supply as well... Everybody is here and willing to help," she says. "But we have to get our laws and act together."
Even with legislation in place, however, fundamental appetite for credit will likely not return unless consumer and business confidence is boosted. That relies on an economic upturn. And, says UBAF's Mr Hassouna, the country cannot hold out forever. "The longer it takes [before an upturn], the deeper the effects will be If the market continues like this, then that will be worrying."
But Egypt's economy has huge potential for growth, says Mr Shehab at Deutsche Bank. The country's fundamentals of geopolitical significance, a large population and a diversified economy remain, despite the turmoil. Plus, it still has the third highest total GDP in Africa and hosts a large number of multinational firms.
"We have a lot of confidence in the economy for many reasons. It is a large market - one of the largest in the region - and it's a diversified economy, not just oil or tourism orientated," he says. "We've got many advantages that Egypt can rely upon to rebound and we see that rebound as just a matter of time. Egypt is important and a cornerstone in terms of the region."
A lasting recovery, however, will depend on political stability. For those in the banking sector - many of whom do not make a secret of their distaste for former president Mr Morsi's policies - the next administration is seen as likely to provide this.
Ms Hashim forecasts that once presidential elections are over and a new team is in place, the population will feel more settled and that confidence and consumption will return. She also expects the effects to be felt internationally, attracting much needed foreign direct investment. "I'm aware many foreign investors whom we talk to are just waiting for this step to happen and then they'll come back in," she says.
The make-up of the new government is important, however, Mr Shehab adds, and will require experts, not just politicians. "The ministers and cabinet will need more technocrats who are quite familiar with the background of business needs and aligning those with both short- and long-term plans of the government," he says.
There are already some positive signs. The stock market appears to be rallying and yields on international bonds have dropped since July last year, seemingly in reaction to Mr Morsi's removal. Fitch Ratings recently upgraded the outlook of its Egypt rating from 'negative' to 'stable' as a result of financial aid and increased stability.
Others urge more cautious optimism. Mr Ezz Al-Arab does not expect a return to normal for this year at least. He recalls that back in January 2011, CIB's board agreed Egypt would be in for a bumpy economic ride for at least the next five years. And that, he says, is exactly what happened. "To see economic prosperity in Egypt will take longer than 2014. It won't be some time until the second half of 2015 - let's be realistic - that you're going to see the real breakthrough."
Further action will likely have to be taken to alleviate Egypt's economic issues. One of the biggest challenges, says Mr Ezz Al-Arab, is addressing energy subsidies, which will cost more than $18bn in 2014 and account for as much as one-fifth of state spending. Currently, 90% of total subsidies are allocated to the richest 20% of the population, according to the International Monetary Fund.
"The electricity we have here is subsidised, my car is fuel subsidised," says Mr Ezz Al-Arab, gesturing around his spacious office in CIB's headquarters. "The top 20% of society should get zero." Other reforms include a much-needed overhaul of tax codes and most likely tax increases too. Neither will be politically popular.
The new administration then, will have numerous difficult decisions to tackle to put Egypt on the road to economic growth and prosperity. But for Egypt's resilient, though not indestructible, financial sector, these decisions must be faced soon.