By Mohamed Allouba

By Rania Oteify

Hassan Abdalla is a man whose quiet authority commands respect throughout the business community. He was one of the first heads of a major bank to pull off a key acquisition last year as new capital adequacy requirements imposed by the Central Bank of Egypt (CBE) forced smaller banks to close their doors or merge with larger players. In the months since, he has seen his net profits nearly double and remains a leading thinker on the state of the market, international banking and domestic economic reform. He spoke with bt last month. Excerpts:

The passage of the new Central Bank Law [The Central Bank, Banking Sector and Monetary Act, Law 88 of 2003] drew lines between the government and the Central Bank of Egypt, setting up the latter as a largely autonomous authority. Additionally, it set a clear vision for the sector in terms of consolidation. As you know the law stipulated that there must be a minimum capital requirement of LE 500 million for banks, which forced banks to increase their capital, to merge or to acquire other banks.

Although the law entered into effect in 2003, it gave a one-year renewable deadline for banks to increase their capital. So it wasn’t surprising that change started to happen in 2004-05, because in the first year no one responded, thinking there would be another extension.

The Central Bank has a very clear vision for the sector. We in the industry now have a council for coordinating policies and have benefited from clear leadership at the CBE.

Arab African International Bank’s buyout of Misr America International Bank was a very important decision for us. It was at the time one of the first unforced mergers or acquisitions in Egypt. We had studied the synergies very carefully. One of them was the branch network and the number of customers, which were very complementary and allowed us to increase our branch network by 10 branches and 15,000 customers overnight. That was important, because it would have taken us at least 12-18 months with the current parameters. Even then, you would get the branches, but not necessarily the customers.

The bank’s performance has been very good, and we have capitalized on synergies as we go along. Last year, the bank almost doubled its profits, clearing a net profit of $53 million, up from $27 million the year before.

The investment climate in Egypt has changed dramatically in the last year, which has attracted a lot of interest from foreign banks. Plus, there is great potential in the banking sector: Egypt has a huge population and there are many areas that have not been penetrated yet, in retail and in corporate banking.

In a nutshell, I believe what has happened in the banking sector is that the reduction of the number of banks and the consolidation increased competition dramatically. We will be competing on pricing, products and services — and it is all going to be better for the consumer.

Currently, banks are mainly looking into large- and medium-sized industries, but they will have to start looking at SMEs. Banks will extend their corporate products, and they will become more active in investment banking deals. There will be a faster product cycle launch, much better customer service and further automation of systems and processes.

Retail banking takes time to build, but it is a more profitable business than corporate because the margins are higher. You can still do a lot of business with mid-sized companies, where margins remain strong and the risk levels are acceptable. Foreign and local banks, in my opinion, will focus on specific niches and segments so that everybody can be served better.

In the meantime, we — as local banks — have to be prepared for the challenge of the new Bank for International Settlements (BIS) terms [widely known as the Basel Rules]. Human resources training will also be very important. I still see further mergers happening, so the number of banks will shrink even further.

Soon, we will have just two major public-sector banks [Bank of Alexandria (BOA) is being privatized, while Banque du Caire and Banque Misr will merge to join the National Bank of Egypt as the last two standing]. It will take time for other banks to build, allowing the Big Two to cater to areas and people who are not bankable in the sense that they are not of interest for most commercial banks. This is a privilege that they are making use of.

My understanding is that the two public-sector banks are embarking on very ambitious restructuring projects, which definitely will add to their competitiveness so they can live up to the challenge and expectation. In short, I think they can maintain their market share.

I think we are just at the beginning —there is much left to be done. We find stronger entities, more competition from foreign banks and more competition from public-sector banks with new management. The sale of BOA will also contribute to the private banks in Egypt, by increasing their market share. If it is sold to a bank that is not already working in Egypt, that bank will suddenly become the biggest private bank in Egypt in terms of size and branches.

The privatization of BOA shows that this is a serious government embarking on a proper program with a real vision to increase competition in Egypt and to create the right environment for people to work in.

Vice Chairman and Managing Director, Arab African International Bank

POSITIONS: Board Member of the Central Bank of Egypt Board Member of the CASE Board Member of the Institute of International Finance (IIF) Member of the Arab Bankers Association

EDUCATION: BA and MA degrees in Business Administration (AUC) bt

As told to Rania Oteify