Concept stage

Report No.: AB3548

1. 
   Key development issues and rationale for Bank involvement
   

1. 
   As part of its comprehensive reform agenda, the Egyptian Government is undertaking substantial reforms in the financial sector, announced in late 2004 and outlined in the five-year Financial Sector Reform Program (2005-2009) within a comprehensive economic reform agenda. The financial sector program is devided into two phases and has three main components: (i) reforming the banking sector through reducing the role of state banks in the joint venture banks, restructuring and privatization of state-owned banks and, consolidation and strengthening of small private banks; (ii) restructuring and privatizing non-bank financial institutions; and (iii) strengthening the legal, regulatory and supervisory framework for banks and non-bank financial institutions in line with international standards.
   

2. One of the CAS objectives is to strengthen the capacity of the financial system to facilitate private sector development. The CAS envisages providing support to the financial sector reform program through two DPLs between FY06 and FY09. The first of these loans, Financial Sector Development Policy Loan (FS DPL I) has been successfully completed. The Bank has been working closely with the Central Bank of Egypt (CBE) in the restructuring of the banking system, as well as with the Ministry of Investment in developing and implementing a detailed restructuring program for non-bank financial institutions, focusing on the insurance sector. The government’s achievements thus far in implementing this reform program is sufficiently encouraging for the Bank to prepare a follow-up FS DPL.

3. 
   The proposed Financial Sector Development Policy Loan (DPL II) will assist CBE and the Ministry of Investment in implementing Phase II of the Financial Sector Reform Program. The Bank is well placed to expand its assistance in these areas, building on the analytical framework developed on the financial sector and on the policy dialogue established with the different stakeholders. The operation will build upon achievements of recent Bank project (DPL I) and recommendations laid out in various ESWs (2007 Access to Finance and Growth in Egypt and 2007 Financial Sector Assessment Program Update (FSAP)). The operation will also draw upon successful non-lending TA provided under the FIRST Initiative. Donors have provided and will continue to provide assistance in a comprehensive, well-coordinated manner to this program. Coordination with other donors will prevent duplication of efforts and ensure complementarity to help the government implement the reform agenda.
   

2. 
   Proposed objective
   

4. 
   The main objective of DPL II is to continue supporting the government implement its reform program. It would aim to strengthen the enabling environment for financial intermediation, enhance resource mobilization and risk management, and increase the private sector’s role and participation in the provision of financial services to support real economic growth. The operation would ensure an adequate beginning to the implementation of Phase II of the reform program—the medium-term objectives, and an execution of a comprehensive reform program, which would ensure sustainability and irreversibility. Within the medium-term implementation frame of the Financial Sector Reform Program. The proposed operation would be results-focused: it will include monitoring the impact of the Financial Sector Reform Program on the performance of banks, insurance companies, and capital markets, in addition to access to finance.
   

4. 
   The project will contribute towards greater financial sector stability by supporting: (i) reducing public ownership in, and control over, banking sector institutions; (ii) financial, institutional and operational restructuring of state-owned banks; (iii) continue strengthening of the legal, regulatory and supervisory framework in banking and insurance; (iv) restructuring state-owned insurance companies; (v) deepening, strengthening and improving of the efficiency of capital markets; and (vii) continuing the development of the financial institutional infrastructure.
   

3. 
   Preliminary description
   

4. 
   The proposed operation would support Phase II of the government’s financial sector reform program and follows up DPL I. This operation’s main elements are: (i) further reduction of state ownership in the banking system; (ii) continuing the financial restructuring of state-owned commercial banks by reducing the outstanding NPLs and substantially improving the provisioning of the state-owned commercial banks, (iii) continuing the progress on the operational and institutional restructuring of the state-owned commercial banks and beginning the restructuring of state-owned specialized banks; (iv) restructuring the state-owned insurance companies and initiating their privatization; (v) strengthening further the legal, regulatory, and supervisory framework for banking, insurance, pensions, and capital markets; and (vi) improving the financial sector institutional infrastructure.
   

4. 
   Environment Aspects
   

4. 
   The policies supported by the proposed adjustment development policy loan are not likely to have any significant direct effects on the environment and natural resources. In addition, the indirect impacts that the DPL is likely to have on the environment are difficult to predict but are expected to be marginal.
   

4. 
   Tentative financing
   

4. 
   Contact point
   

Title: Senior Financial Economist

Tel: +2-02-2574-1188

Fax: +2-02-2574-1676