On financial liberalisation in LDCs : the case of Egypt, 1960-93

Abstract

This thesis deals with the issue of financial development in Egypt at the sectoral, macroeconomic and household levels over the period 1960-93. The thesis is organised in ten chapters, including a summary of the main results in chapter (10). Chapter (1) provides an introduction of the topics treated in the thesis and an overview of the main developments in the Egyptian economy during the study period. Chapter (2) reviews the theoretical literature and empirical studies on the main issues concerning financial development. Chapters (3) and (4) derive stylised facts from the discussion of the evolution of the financial system in Egypt. Chapter (3) assesses the structure, regulation and performance of the banking sector. Chapter (4) focuses on the Egyptian securities market, exploring its development since its establishment in 1883. Further it analyses the performance of the market using the main published indicators and highlights the impediments to its progress. Chapter (5) is concerned with the growing role of Islamic finance in both the formal and informal sectors in Egypt. After constructing a model to illustrate the distinctive characteristics of Islamic banking, the chapter investigates the role of Islamic banks and Islamic branches of conventional banks. The chapter also provides an analysis of the Informal Islamic Investment Companies which flourished in Egypt during the 1980s. Chapter (6) analyses the causes, measures and impact of financial repression in Egypt over the period 1960-90. The findings of this chapter indicate that financing the budget deficit was the main reason for repressing the financial sector. The chapter discusses the impact of the different repressive methods used including inflation tax, interest rate ceilings, high reserve requirements, directed credit schemes, regulation on the portfolio composition of banks, and government ownership of financial intermediaries. The government revenues from particular repressive measures such as inflation tax, seigniorage and interest rate ceilings were estimated for the whole study period and were substantial by most international standards. There follows a discussion of the main consequences of financial repression including capital flight, money substitution, the excessive use of inflation hedges and the thriving of informal financial transactions. Chapter (7) presents an econometric analysis of the impact of the real interest rate on saving, investment and economic growth in Egypt. The results of this analysis indicate that the real interest rate had a positive impact on financial saving, possibly through a portfolio shift. However its impact on total saving, investment and economic growth was insignificant. Chapters (8) and (9) are concerned with the issue of the coexistence of formal and informal financial sectors in rural Egypt. The analysis is based on a survey, of 200 households undertaken by the author in four Egyptian villages in the Nile delta. The methodology adopted and the description of the surveyed region are reported in chapter (8). The findings provided in chapter (9) suggest that informal financial transactions in our sample can be classified as intermittent. There was no evidence of the existence of professional money lenders. Loans, with very few exceptions, were interest free. Most loans were undertaken without contract or collateral. However default cases were low thanks to societal governance. Moreover the chapter analyses the characteristics of RoSCA in Egypt and its role in financial intermediation. The determinants of formal and informal borrowing are estimated using Tobit analysis. The chapter concludes with a discussion of the implications of financial liberalisation on household credit decisions. This thesis highlights the importance of a liberalised financial system for economic development in Egypt. However it argues that financial liberalisation, on its own, is not a sufficient remedy for the problems encountered in the financial sector. Macroeconomic stability and prudential regulation are considered to be essential prerequisites for liberalisation. In addition the thesis strongly emphasises the need for the restructuring of the financial system and the ensuring of its compatibility with the cultural environment to enable the full realisation of the benefits of financial liberalisation