Economic Reform, Banks’ Efficiency and Market Structure in Egypt

Abstract

Egypt during the period of 2000 until 2010 witnessed major activities of economic cycles, financial reform, bank reform, development and restructuring that changed the face, structure and size of banks and the banking industry. New regulations, new laws, and Nazif’s government that was appointed in 2003, fostered the change especially during worldwide recession, economic boom, tighter regulation on the financial sector and financial crises.
This thesis assessed the changes that happened in the Egyptian-banking sector during the period of 2004 until 2010, in term of efficiency change and industry structure. The research investigated the hypotheses that the lower the number of banks and the larger capital available for them, the higher the efficiency. The research used Data Envelopment analysis (DEA) methodologies to test the hypotheses on 27 banks out of 39 banks in Egypt that account for 90% of banking activities in Egypt. The input variables were the available funds and the owners’ equity. While the output variables were net loans, securities, operating profits and net profit. Output oriented tests were conducted using the BCC (Banker – Charnes – Cooper), CCR (Charnes – Cooper – Rhodes) and Window analysis. In addition to the full sample, segmentation between private vs. public and international vs. local & regional were conducted. Moreover, the research also includes a descriptive analysis of the banking activities and changes that occurred during the period of study, and conducted a concentration index for the banking sector.
The research indicates that there was slight improvement in efficiency during the period of study, and that having more funds, resources may lead to improvements in efficiency. Although the banking industry increased in size (deposits, loans, profits and branches), the concentration ratio increased slightly, which indicates the dominance of few banks on the sector.
The thesis recommends that banks and the central bank could work on different dimensions to improve efficiency by having better reach, products and better assets utilization, and continue in the reform to reduce the concentration ratio, especially that the public sector still has ownership in 17 banks out of the sample of the 27 banks.