Egypt’s changes to capital markets law are credit positive for banks: Moody’s

Law amendments made to Egypt’s Capital Markets Act last week are credit positive for banks, as the increased capital markets activity will raise lenders’ income from their debt capital markets business while also providing funding options, Moody’s Investors Service said on Monday.

The law amendments, voted into action last Tuesday by the parliament, will help deepen the financial markets in Egypt by facilitating sukuk issuance and investors’ ability to hedge, making the country a more appealing investment destination to foreign investors, the agency added.

The amendments include the introduction of futures trading, a commodities exchange, allowing the establishment of privately owned stock exchanges, and reducing listing fees to 0.002 percent from 0.005 percent to encourage smaller companies to list on an exchange.

The amendments also facilitate sukuk issuance, set higher penalties for violations of the law and set up a federation for non-banking financial companies, similar to the Federation of Egyptian Banks.

Moody’s noted that Egypt’s capital markets are underdeveloped when compared to African peers, with the nation ranking 14th among the 17 African countries in Barclays Africa Group 2017 Financial Market Index.

“Although Egypt is the largest Arab country by population, the sukuk market is inactive, something the authorities are aiming to address with the revised law,” it added.

Increasing the products offered and investors’ ability to hedge will increase Egypt’s attractiveness to foreign investors, which would provide additional funding options for banks, the report said. 

Additionally, the income banks earn from their debt capital markets activity will increase, diversifying their operating income, it added.

“Although banks likely will lose loan business as some of the country’s largest corporates begin to finance their operations through the yet-to-be-developed debt markets, banks’ increasing lending to the country’s underserved small and mid-sized enterprises (SMEs) will support loan growth and profitability,” the agency said.