The International Monetary Fund (IMF), in its 2006 Article IV Consultation report of Egypt states that Egyptian authorities continue to make efforts to bring banking supervision in Egypt in line with international best practices. A 2004 report by the IMF indicated that Egyptian legislation concerning banking supervision largely complies with Basel Core Principles. Furthermore the 2006 Global Survey by the Institute of International Bankers (IIB) notes that the government of Egypt in 2006 continued to pursue the Banking Sector Restructuring Plan for which the country receives assistance from the European Central Bank. According to a 2006 report by Oxford Analytica, the Central Bank of Egypt is the agency responsible for framing policy related to banking and supervising the banking system. The Law on the Central Bank, Banking Sector, and Monetary System (also called the Unified Banking Law) of 2003 defines the CBE's role and responsibilities. The 2006 IMF report notes that banking sector indicators such as capital adequacy ratios have been increasing and nonperforming loans (NPLs) have begun declining. However, there is insufficient information publicly available as to Egypt's compliance with each Basel Core Principle.

General Overview

Information provided in a 2004 International Monetary Fund (IMF) report by Creane, et al. indicates that Egyptian legislation concerning banking supervision largely complies with Basel Core Principles and the shortcomings related to connected lending and market risk. The IMF's 2006 Article IV Consultation welcomed the Egyptian authorities efforts to bring banking supervision in Egypt in line with international best practices. According to the 2006 IMF report, the Egyptian authorities have progressed significantly in strengthening the banking sector by privatizing state-owned banks such as the Bank of Alexandria (BoA) and merging two of the remaining three state banks. Furthermore, the IMF report notes that banking sector indicators such as capital adequacy ratios have been increasing, nonperforming loans (NPLs) have begun declining, and the rates of return on assets have been rising.

According to a 2006 report by Oxford Analytica (OA), the Central Bank of Egypt is the agency responsible for framing policy related to banking and supervising the banking system. The Law on the Central Bank, Banking Sector and Monetary System (also called the Unified Banking Law) of 2003 defines the CBE's role and responsibilities. A Banking Reform Unit was created within the CBE with the aim of restructuring the banking sector in such a way as to facilitate its privatization and consolidation, reduce the number of operating banks, and reduce the number of non-performing loans (NPLs) (OA 2006).

The 2006 Global Survey by the Institute of International Bankers (IIB) notes that the government of Egypt continued to pursue the Banking Sector Restructuring Plan for which it is to receive assistance from the European Central Bank. The IIB report indicates that the reform process includes, among other things, a shift from a compliance-based to a risk-based supervision approach (IIB 2006).

The CBE in 2003 released a report on the Egyptian banking sector's reform policy, responding to issues raised in a 2002 IMF and World Bank Financial Sector Assessment Program (FSAP). The CBE's report stated that "the Central Bank of Egypt worked on four directions; the legislations required to introduce additional reforms, the prudential regulations for better banking practices, bank directors and corporate governance and the modernization of the informational infrastructure to support decisions of bank management (p. 3). The report further indicated that prudential regulations have been published providing a comprehensive definition of connected parties, credit exposure and new regulations regarding connected and related party lending have been enforces. Furthermore, all banks have been requested to comply with the minimum capital adequacy ratio of 10%.

The 2006 annual report by the CBE noted that the authorities continued their comprehensive reform policy through 2005-2006. The report also indicated that the fourth pillar of the reform process which is currently being implemented dealt with upgrading the Banking Supervision Sector at the CBE with the aim of conforming it to best international practices and risk-based supervision.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

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According to a 2006 OA report, the CBE is the agency responsible for framing policy related to banking and supervising the banking system. The Law on the Central Bank, Banking Sector and Monetary System (also called the Unified Banking Law) of 2003 defines the CBE's role and responsibilities. A Banking Reform Unit was created within the CBE with the aim of restructuring the banking sector in such a way as to facilitate privatization and consolidation, reduce the number of operating banks, and reduce the number of non-performing loans (NPLs). However, there is insufficient information publicly available as to Egypt's compliance with this Principle.

1.(2) Operational independence and adequate resources.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

1.(3) A suitable legal framework for authorization and ongoing supervision.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

II

There is insufficient information publicly available as to Egypt's compliance with this Principle.

1.(5) Legal protection for supervisors.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

4. Authority to review and reject transfer of ownership.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

5. Authority to review major acquisitions and investments.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

II

Writing for the IMF in 2004, Creane et al. note that the capital adequacy ratio (CAR) was increased from 8 percent to 10 percent at end-2002. According to the IMF's 2006 IMF Article IV Consultation report on Egypt, banking sector indicators such as capital adequacy ratios have been increasing. However, there is insufficient information publicly available as to Egypt's compliance with this Principle.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

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According to the IMF's 2006 IMF Article IV Consultation report on Egypt, banking sector indicators such as, nonperforming loans (NPLs) have begun declining. However, there is insufficient information publicly available as to Egypt's compliance with this Principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

II

A 2005 report by the Ministry of Investment indicates that "loan provisions ratio increased dramatically during the years 2001-2005. It increased from a minimum of 9.9 per cent in June 2000 to reach 14.4 per cent in March 2005" (p. 19). However, there is insufficient information publicly available as to Egypt's compliance with this Principle.

9. Prudential limits and management information system on concentration of exposure.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

10. Arm's length rule and monitoring for connected lending.

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Writing for the IMF in 2004, Creane et al. report that connected lending and market risk are the main weaknesses in regulations in banking supervision in Egypt. However, there is insufficient information publicly available as to Egypt's compliance with this Principle.

11. Policies and procedures for country risk and transfer risk.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

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Writing for the IMF in 2004, Creane et al. report that connected lending and market risk are the main weaknesses in regulations in banking supervision in Egypt. However, there is insufficient information publicly available as to Egypt's compliance with this Principle.

13. Comprehensive risk management processes.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

14. Adequate internal controls.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

15. Strict "know-your-customer" rules and high ethical and professional standards.

II

According to information provided in the 2007 U.S. DoS report, the AML law mandates that banks: (1) maintain records of customers for 5 years; (2) maintain internal systems ensuring compliance with the AML law; (3) voluntarily report suspicious transactions; (4) examine large transactions; and (5) produce quarterly compliance reports. The report also notes that the AML law prohibits anonymous financial accounts (U.S. DoS 2007). Moreover, the 2005 UNODC report states that the Central Bank of Egypt and other financial regulatory bodies have been actively involved in issuing regulations related to Know Your Customer (KYC) and Suspicious Transaction Reporting (STR) requirements. However there is insufficient information publicly available as to Egypt's compliance with this Principle.

The CBE with the MLCU monitors the banking sector and also the bureaux de change and money transmission companies for foreign exchange control purposes according to the 2007 U.S. DoS report. The CBE jointly with the MLCU undertook a self assessment in 2006 of the banking sectors AML systems and found that only one bank was noncompliant, and in the case of deficiencies the CBE notified the banks as to the course of corrective measures to be undertaken (U.S. DoS 2007). The U.S. DoS 2007 report also indicates that the CBE and the MLCU plans to continue to undertake comprehensive periodic assessments and follow-up visits and that MLCU, since its inception, has received over thousand STRs and has brought several cases to court.

16. Effective supervisory system consisting of on-site and off-site supervision.

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According to information provided in the CBE's 2006 Annual Report, the CBE performs on-site examinations regularly and, during FY 2006-2007, 16 banks were examined. However, there is insufficient information publicly available as to Egypt's compliance with this Principle.

17. Regular contact with bank management and understanding of bank's operations.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

20. Ability to supervise on a consolidated basis.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

22. Adequate supervisory measures to ensure timely corrective action.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

In its 2006 Annual Report, the CBE states that it applies risk-based supervision to assess banks' ability to identify, measure, monitor, and control risks, and examines the adequacy of procedures and internal control systems applied at banks. the report also mentions that the CBE conducts regular on site inspections for early detections and rectifications of any irregularities in banks. Moreover, according to the CBE's 2006 Annual Report, the Supervision Sector at the CBE is being reformed and a two-year technical assistance program (starting December 2005) was signed with the European Central Bank (ECB) and four central banks in Europe, namely, Banque de France, Bank of Greece, Banca d'Italia and Deutsche Bundesbank.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

24. International exchange of information with other supervisors.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

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There is insufficient information publicly available as to Egypt's compliance with this Principle.