Ozean Journal of Applied Sciences 2(1), 2009

Ozean Journal of Applied Sciences 2(1), 2009

ISSN 1943-2429
2009 Ozean Publication

Globalization and its Effects on the Banking System performance in Egypt

Ezzat Molouk Kenawy
Faculty of Commerce-Department of Economic, Kafr Elsheikh University, Egypt
E-Mail: bardis2008@hotmail.com
______________________________________________________________________________________
Abstract: Since the implementation of the Economic Reform Program in Egypt in the early 1990s, Egypt
has paid great attention to the reform of the banking system through merging and possession to face
banking competition within the framework of financial globalization,expanding the capital base of
corporate banks and restructuring banks to keep up with international developments. To activate this,
Egypt issued the United Bank Law No. 88 for the year 2003 with the aim of activating and enhancing the
banking system and increasing the merging process in order to form strong banks with high financial
positions. Despite the measures Egypt took to reform and enhance and restructure the banking system, the
profits achieved by banks are still low. Also, the contribution of the financial sector in the gross domestic
product remained low (8.3% in 2007). This may be attributed to the increased value of default loans and
the slow procedures followed to adjust and handle them, in addition to other factors that clearly affect the
efficiency of the banking system. The present research aims to explain the Effect of Globalization on the
Banking System performance in Egypt and identifying the performance of the Egyptian banking system and
the challenges facing that performance in achieving more effective contribution in moving the economic
development wheel .Finally, the research presents the most important results it has reached, making some
recommendations which will enable Egyptian Banking System to play an active and effective role in raising
the level of the quality of banking services.
Keywords: egypt, banking globalization, banking mergers, governance, basel committee, economic effects
______________________________________________________________________________________

INTRODUCTION
The banking sector is one of the most important economic sectors and the most influential and responsive
to changes, whether international or domestic. The most important of those changes include technological
developments, the internationality of money markets, and freedom from the constraints that hinder all
banking activities, the removal of barriers that prevent some financial institutions from working in certain
sectors, and the trend to develop and manage the risks of lending in light of the increase in international
competition in this sector while seeking to attract foreign capital with the emergence of giant banking
entities.
The Egyptian banking system is one of the important channels for mobilizing savings in the form of credit
or investment tools and working to direct them to more effective and more profitable productive sectors
and activities. Added to this is the role which the banking system plays in activating and enhancing
privatization and attracting investments to get the financial resources required for developmental needs.
Since the implementation of the Economic Reform Program in Egypt in the early 1990s, Egypt has paid
great attention to the reform of the banking system through merging and possession to face banking
competition within the framework of financial globalization(Tarek,H.2002),expanding the capital base of
corporate banks and restructuring banks to keep up with international developments. To activate this, Egypt
issued the United Bank Law No. 88 for the year 2003 with the aim of activating and enhancing the banking

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system and increasing the merging process in order to form strong banks with high financial
positions(Farag A.,2005).
The severe competition among commercial banks in the past two decades led to an urgent need to study the
impact of the elements of the quality of the banking services provided for the clientele on the competitive
position of banks and, therefore, their profitability. (Schwartz, M, 1989) identified four basic dimensions
for measuring the quality of banking services. These are: banking service, consumer service, physical and
electronic resources and method of providing service to customers. (Bergman and Klefsjo, 1994) noted that
quality has become a strategic weapon in the conflict taking place to gain market shares and promote
profitability.
Problem of the Research: Despite the measures Egypt took to reform and enhance and restructure the
banking system, the profits achieved by banks are still low. Also, the contribution of the financial sector in
the gross domestic product remained low (8.3% in 2007). This may be attributed to the increased value of
default loans and the slow procedures followed to adjust and handle them, in addition to other factors that
clearly affect the efficiency of the banking system(Moustafa, M.,2000).Within this framework, the present
study attempts to answer the following questions: What is the Effect of Globalization on the Banking
System performance in Egypt?, What is the role of banking systems in contributing to financing economic
sectors after the implementation of monetary and financial reforms?, What is the position of the Egyptian
banking system in the world banking industry circle?
Objective of Research: The present research aims to explain the Effect of Globalization on the Banking
System performance in Egypt and identifying the performance of the Egyptian banking system and the
challenges facing that performance in achieving more effective contribution in moving the economic
development wheel . Finally, the research presents the most important results it has reached, making some
recommendations and suggestions which will enable Egyptian banks to play an active and effective role in
raising the level of the quality of banking services.
Research Hypotheses: The present Research draws on the following hypotheses:
The implementation of the Economic Reform Program has a positive effect on the performance of the
banking system. Banking Mergers leads to the achievement of economies of scale and increases the volume
of activity and savings and reduce the costs of the activity. With increasing globalization, banking work
became exposed to risks whether external or internal factors.
Research Method: The present research uses the descriptive quantitative analysis method, using data and
Informations which are published in the reports of the Central Bank of Egypt, besides the books and
scientific periodicals in this field.
Research Plan: The Research falls into sixth main Parts as follows: First: The Concept of Banking
Globalization .Second: The Concept and Motives of Banking Mergers. Third: Basel Committee for the
development of banking supervision .Fourth: Governance and its Role in the Egyptian Banking
System .Fifth: The Challenges Facing Banking System under Financial Globalization. Sixth: Results and
Recommendations.
The Concept of Banking Globalization and its Economic Effects on the Banking System.
The concept of banking globalization: The phenomenon of globalization has become one of phenomena
that are most associated with economic activity. Globalization is also linked to banking activity as part of
economic globalization. Globalization has taken banking dimensions and contents of a new, made the
banks tend to the fields and activities unprecedented, and led to the transition from the attitudes and
perceptions of activities and extended range, in order to maximize the opportunities and increased gains,
and look to the future(Abdel-Bar,S.,2006) .

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As the banks and banks manufactured identity and personality through orientation, which charted
throughout its history, since its inception, the bank has made globalization futuristic vision of a new
dimension to enter the new world of cosmic, a world of enormous economic opportunity.
In light of globalization and the restructuring of the banking services industry trend banks and commercial
banks in particular, the shift towards universal banks. Are those banking entities that seek always behind
the diversification of sources of funding and employment, and mobilization of the greatest possible savings
from all sectors, and employ their resources in more than one activity in several diverse areas. It opens and
gives credit to all sectors. As well as working to provide all the miscellaneous services and renewable
which may not based on the balance of knowledge. In light of globalization become banks innovate and
create distinct clients, and provide them with future richer and richer more at the level of banking service
(El-Dabie, A., 1999). And the future of this innovative technology is owned and used by banks, which are
only common denominator in all the work of trying to progress and to the growth and prosperity.
Hence the concept of globalization has been associated with the concept of abundance and availability of
the services provided by banks. The accurate view to provide banking services, whether related to deposits,
loans, or bonds (as traditional services), or to the contracts of complex derivatives or other innovative
advanced services, leads banks to exist effectively in all fields of economic activity.
At the same time, the organic link with banking groupings and blocs is the basis for the bank to reach the
large economic size, which allows economies of scale and amplitude banking. This has led to the
integration association of the World Bank, which is based on specialization and the division of labor, which
maximizes the quality of performance and the ability to upgrade the level of saturation.
It can be argued that the changes reflected in the banking world of globalization on the performance of
bank, is the emergence and growth of new banking entities, which are clearly a coup in the world of banks.
The giant banking entities, by virtue of the enormous economic power relations and the large economic size,
and high economic performance, has become a high capability to influence the form and market trends
banking growing global growth and accelerating the proliferation and expanding through a presence in all
parts of the world(El-Naggar,F.2000).
Banking globalization never means abandoning what exists and is directed towards the national domestic
market, but it means gaining new momentum, and moving to provide banking services from the inside to
outside, keeping the national position more effective and more capable and active to ensure banking
extension and expansion(Hefny,A.,&Abu-Qahf,A.2000).
Globalization is not a framework for action in so much as it is a motivator of work too. Thus, banking
globalization draws on several reasons that must be identified and, at the same time, must be linked with
the pillars driving the growth of the bank and its expansion and enhancing its capabilities.
Economic Effects of Globalization on the Banking System: Many changes and developments, studies and
events and repercussions of globalization indicate that it has a large-scale impact on the banking system in
any country in the world, including the Egyptian banking system. It must be noted that the economic effects
of globalization on the banking system may be positive or negative; the task of those in charge of the
management of the Egyptian banking system is to maximize the positive effects and minimize the negative
ones. Therefore, reference may be made to a number of serious economic effects of globalization on the
banking system, through the following analysis:
Restructuring the banking service industry: A significant change occurred in the work of banks and the size
and scope of their banking services whether at the local or international level expanded. All banks are
going to perform banking and financial services that they have not provided before. This is clearly reflected
in the structure of bank budgets. On the other hand, declined relative share of deposits in total liabilities to
banks. The liabilities are trading in the share relative to the total liabilities of banks due to the increasing
activity of banks in activities other than lending, and led to a decline in the share of loans and increase the
relative share of other assets, in particular the issuance of bonds. The effects of globalization on the
banking system did not stand on the restructuring of the banking services industry, has been extended in an

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indirect entry to non-bank financial institutions such as insurance companies and pension funds, a strong
rival of the commercial banks in the area of financial services, which led to the retreat of the role of
commercial banks especially in the field of financial intermediation(Mohamed S., 2003).
Diversification of banking activity and the tendency towards dealing in financial derivatives: This includes
the diversification of banking services at the level of funding sources, the issuance of marketable deposit
certificates and long-term loans from outside the banking system and at the level of expenditure and
banking investments, and then the diversification of loans granted and the establishment of banking and
securitizing holding companies. In other words, this means transferring banking debts to contributions in
the form of securities and engaging in new investment areas such as attribution and performance of
investment banking and the financing of the privatization at the income level to engage in non-banking
areas, then the tendency towards leasing and trafficking in currency and deepening the activity of issuing
securities, the establishment of investment funds, and insurance activity through sister insurance companies
involved in holding companies management of investments for the benefit of customers.
The necessity of adhering to the decisions of the Basel Committee: With increasing globalization, banking
work became exposed to risks whether external or internal factors and banks had to be causation about risks
using several means, the most significant of which is strengthening capital. The criterion of capital
adequacy became increasingly important since it was approved by the Basel Committee in 1988, and it
became necessary for banks to abide by it as a global criterion, and thus banks were affected but this
criterion as the ratio of their capital to total at-risk assets after weighting them against credit risks must
reach at least 8% by the end of 1999(National Bank of Egypt, 2001).
The amendments with respect to such decisions, and these came to be known as Basel Decisions II, and this
new framework for capital adequacy must be in line with current developments in the global banking
market. Here the Basel Committee seeks to develop a new and comprehensive framework for capital
adequacy to focus on the following regulatory objectives (Shalaby, M., 2005):Continue to enhance the
safety and soundness of the financial system, Continue to support competitive equality, and Creating
comprehensive way for coping with risks.
The new framework proposed by the Basel Committee for capital adequacy is expected to be the
cornerstone of the international financial engineering process currently under way. The main objective is to
promote the safety and integrity of the international financial system, based on the composition of that
capital is sufficient to meet the financial risks diverse and growing. Believes the Basel Committee that new
framework must be maintained at a minimum at the current level of capital in the banking sector.
The focus of the new framework proposed to absorb the risks inherent in each banking group, at the same
time must work this framework to provide security and safety independently of each institution within the
group. To this end, the Basel Committee proposed to be expanded to include the old framework on the
basis of compound all companies Holding group, which includes banking, which in turn engage in banking
activities. In some States, the banking group can be recorded sink, and in addition to that we must
emphasize regulatory authorities on the issue that every bank in the group enjoys adequate capital (Zayed,
H., 2003).
Banks have expanded increasingly towards new fields within the financial activity, particularly the fields of
securities and insurance. Therefore, the Basel Committee is working to clarify how to treat bank investment
operations in these fields. With regard to diverse financial groups, the Committee recognizes the need for
follow-up work with the regulatory authorities supervising insurance companies and securities in order to
determine the criteria for capital adequacy.
Intensified competition in the banking market after the agreement on the liberation of the banking services
trade: With the increase of financial globalization, services liberation agreement was liberated from the
constraints that came out in the GATT in Uruguay round in 1994. Competition within the framework of
the Banking Services Agreement took three major manifestations of trends (Tawfik, H., 2001):

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First trend: competition among commercial banks whether in the local banking market, or the global
market.
Second trend: competition between banks and other financial institutions.
The third trend: competition among banks and other non-financial institutions to provide banking services.
These trends led to the intensification of competition in the banking market in light of the removal of
geographic barriers to meet the needs of clients so that financial institutions other than banks may enter the
banking market, particularly financial services markets. Competition is expected to continue with the entry
of insurance companies, securities firms, financial institutions and financial intermediation institutions in
the light of the increasing desire to provide financial services related to banking activity.
Importance and characteristics of modern banking services: Banking services represent one of the
important activities in any country. If we look at the banking services as an economic activity, we find that
it has a number of characteristics, the most important of which are the following (World Bank, 2001:)
Complexity and multiplicity of banking service and its relation to all other economic and social activities in
the country.
The demand for banking services is an indication of the degree of the economic progress of the country,
since the banking service is a productive activity of a particular nature and is related to different
development issues. The supply of banking services is an indication of the level of economic prosperity in
the country, as well as the different characteristics of population, in addition to its political and economic
ties to other countries of the world. The demand for many banking services is characterized by repetition.
Banking services are considered an industry as they have all the requirements and elements of any
productive activity.
There is no doubt that the availability of features means the need to keep up with the former banking
activity to the requirements of development in all aspects of economic and social activity in any country
regardless of the nature of its economic or political philosophy.
In short, the banking services, like other aspects of economic activities, went through several stages of
development, with a mere shift of activity from conducting lending and deposit within the borders of the
State concerned for the banks to enter into the fields of investment and owned for many industrial projects,
service trade, as well as exporting services outside the State border and the spread of the branches of many
banks in most countries around the world and the emergence of multinational banks ... Etc.. There is no
doubt that this major transformation in the remarkable diversity of banking services in the industry or banks
in general was a necessity imposed by the reality of evolution and rapid growth in various economic
activities in the various countries of the world. This is what makes many of the writers and practitioners in
the industry believe banks that the real problem facing men banks lies in the face of how to manage change
and the rapid growth in economic and social areas successfully, in addition to the change and evolution in
the market for the banking industry, which has become characterized by severe competition.
The Concept and Motives of Banking Mergers
The Concept of Banking Mergers: One of the economic impacts of globalization is what happened in the
present time of the wave & Majat bank between big banks and small banks and large and each other. The
process of integration of numerous banking and speed become a global phenomenon affected by all the
banks in the world. Mergers and banking in general is the Union Bank in more than one bank or melting
bankers or more entities into one entity, and the most important of many mergers
motives(Robert,A.&Manmoban,S.1995): to achieve economies of scale and defended expansion and
improve profitability in the context of Liberation of banking services.
The banking mergers is the process whereby financial cornering bank or more by other banking institution
where the bank abandon integrated usually give up on the smaller bank license and take a new name on
behalf of the institution Aldamjh as add-nuclear assets and liabilities of the bank integrated to the assets and
liabilities of the merger bank.

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Motives behind Merging and Acquisition: There are many reasons and motives for mergers and acquisition
is different from the banking sector and any other companies differ from one activity to another or from
one sector to another sector of the national economy. These motives and reasons can be divided into
(Shehata, I., 2001):
Motives for maximizing the value of the business (the bank): International capital markets are adopting free
competition and market mechanisms and motivation, the primary goal of its activity is to maximize revenue
and market value of the shares, however, shows that although the maximization of value is important
elements when deciding whether sale or merger but there are other considerations that must be taken into
account, in particular, For mergers Egyptian banking system, the value of any bank is determined by the
discounted present value of expected future profits, as mergers and acquisition lead to increased profits for
the current discounted expected future profits due to lower costs or increase revenue projected or both. The
truth is that mergers and acquisition lead to lower costs due to (Tarek, H.2002):
A. Merging leads to the achievement of economies of scale and increases the volume of activity and
savings and reduce the costs of the activity and mergers and acquisition leads to a change in bank
management and the selection of leaders to pursue more efficient and modern management methods which
leads to lower costs and increase profits application of the economics area to the lower unit cost due to
integration The overlap when the institution produces many products lead geographical spread and
diversification of risk to reduce risks and increase the activity and profits may also lead to a reduction in tax
liabilities lead to increased merger monopoly power of the bank, which puts it in a better position when
buying production requirements or determine the price and then exceptional profits for the lead as large
scale to increase the ability to penetrate markets and increase the credit itself as leading mergers and
acquisition to increase profits: As mergers lead to the large volume of the bank and increased geographical
spread and increasing potential clients and provide better services leading to increased profits as lead the
multiplicity and diversity of products to increase the share of the bank in the banking market and attract
new clients and the monopoly power of the bank unable to control the prices of services and increase its
profits, therefore, increase.
B. Motives of merging and acquisition not related to the maximization of the value of the bank : These are
the motives related to the achievement of the objectives of the bank that the decisions of the bank may not
always aim to maximize the value especially when there is a separation between management and
ownership, the management has taken some decisions for personal goals and not to serve Valmderin
owners who run banks, large companies or large rate a high degree of conviction and complacency result of
the increase in the degree of safety in their jobs and their income and thus distinguished may resort to
mergers to increase the size of the bank, even if it did not lead to the maximization of the value of the bank
accounts of any other institution to fear the establishment of an institution to greater absorption institution
which defines possession defensive As mergers and acquisition may build on factors are not intended to
maximize the value of the bank and it does not lead to the hoped-for results of the integration process and
therefore been many studies to determine the best methods for reducing the degree of probability that
managers merger-related operations to maximize the value of the bank and that are incompatible with the
interests of shareholders. Among the most important suggestions in this regard are the following (Ibrahim
M., 1999):
Managers should own an acceptable percentage of the bank's capital, which makes their work to increase
the value of the bank and not to resort to mergers inconsistent with that.
The need to focus property owners so that the bank can effectively influence the actions of managers in the
opposite case when there is a break in the property in this case managers the opportunity to be more of the
movement and decision-making.
The need for independent external members of the Board of directors, which makes it easy to control the
behavior of managers.
Motives and external factors of merging and acquisition: There are many external factors that led to the
proliferation of mergers and acquisition between both banks or companies and institutions - for the banks

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there are certain circumstances led to the adoption of banks to mergers and acquisition as one of the
methods of restructuring after his many banks to financial crises and there are many obvious international
experience of the phenomenon during the nineties, where the Japanese monetary authorities and possession
of integrating operations of financial institutions in the framework of the program of restructuring and
capitalization of financial institutions and banks faltering. The motives and external factors of merging and
acquisition is not linked to a certain period of time such as times of financial crises. The factors which have
contributed to widening the spread of the phenomenon of merging and acquisition since the early 1990s
include (El-Said, H., 2004): technological development, getting rid of restrictions, and globalization of
financial markets. Banking services witnessed tremendous development and radical changes as a result of
technological progress which changed job competitiveness both for the production, distribution and
marketing methods and then create new products and thus the process of restructuring aimed at increasing
competitiveness of the banking system has led to the creation of the appropriate environment for the
process of merging and acquisition.
Determinants of merging and acquisition in the banking system: When it is necessary to prepare plans for
mergers and acquisition knowledge of the banking system parameters and considerations necessary for the
success of the integration process and achieve its objectives and to identify financial institutions that will be
merged. These determinants are as follows (Tarek, H.2002):
Setting the goals to be achieved during the long time where it is necessary to identify each bank's long-term
objectives it seeks to achieve, it is necessary to estimate the extent of future improvement in revenues due
to the depreciation of the competition as a result of the merger determine the impact of mergers on financial
risk management in reducing the degree the risks posed to the banking system following the mergers to
reduce financing costs Will lead to decreasing the cost of banking services following the merger on the
competitiveness of the banking system and its ability to depletion of the international markets and through
those factors and parameters can be determined target growth rates of the bank and whether this growth
horizon Through horizontal merger with Bank or institution working in different activity.
The need for sound and appropriate banking policies for the newly merged entity: Banking merging
supports capital and reduce the cost and increase the effectiveness of the activity merged banks increase
their competitiveness and thereby increase their ability to deal with international developments and changes
and the accompanying risks can be achieved only if the units are strong while banking Some believe that
the strongest banks is not only big banks, but it is very important to the existence of sound policies and
banking systems appropriate and what was the size of the bank even if the small banks resulting from heart
banking mergers can grow healthy growth and apply sound policies leading to increased competitiveness
and face the risks, however, to achieve those goals will depend on a sound policies and practices of the new
entity, and that the process of integration needed for the delay and inaction to re-evaluate each of:-the level
of performance and management policies of both liquidity and credit and deposits and investments as well
as capital structure and dividend policies and structure of operating costs and other expenses to ensure their
compatibility with the objectives and characteristics of the institution new banking and this requires a
certain period of time(Gomaa,F., 2000).
The need to identify the appropriate structure of employment and the attitude of workers towards merging:
Important factors that must be taken into account when conducting mergers include employment structure
before and after the merger, the position of management and workers unity bank target of the process of
integration where integration process to restructure labor and management the two institutions and,
therefore, may oppose the merger and it is therefore necessary to identify the sites responsible for
administrative functions new banking unit in order for the new administration to perform its work
efficiently and to eliminate duplication of work in certain departments and the dismissal of labor
unproductive and therefore it is necessary to determine the structure of the new employment before the
merger.
The need to work to continue competition in the banking system after merging: Since merging may lead to
decline in the number of banks, the banking system, which may lead to the elimination of competition must
prevail banking market also believes that some people might accompany the merger capture a limited
number of banks to Britain ratio of the banking market and control through oligopoly This does not only

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lead to the elimination of competitive advantages and mechanisms of supply and demand and competition
among many banking units to obtain appropriate share in the banking market, which reflected the negative
performance of the banks and their role in the development process efficiently, but also for the economic,
social and political accumulation of capital in a limited number of the banks control the market probably in
the national economy.
Sources of financing the merging and acquisition: Where implementation of mergers either purchase the
assets of the bank integrated or purchase shares from the stock market.
Financing the merging by purchasing assets: According to this method, the Bank Merger purchase all or
some of the assets of bank suffered in cash or shares will be distributed in cash and shares to shareholders
in the form of share liquidation and thus solve the bank targeted in some cases may continue business in the
sale of assets and operating as a separate but each smaller.
Financing the merging by purchasing shares: According to this method, the merged banking unit disappears
the merger bank buys all assets and liabilities, while money is used to finance other forms of integration
that the rules only require the bank to pay the value of the merged unit through the issuance of the Unit
bank obsession to additional shares This method is not subject to tax(Gomaa,F., 2000)
.
The merging process also requires long-term financing, and the issuance of additional shares is considered
the best way as the banking unit using proceeds from the sale of additional shares to buy banking unit target
or sell new shares to shareholders in the unit by changing the target shares. Unity Aldamjh particular
exchange rate or borrowing funding is remarkably such methods lead to an increase in the debts of the
merger banking unit(El-Said, H.,2004).
Basel Committee for the development of banking supervision: In light of the trend towards greater
globalization, the financial stability is a major priority in the framework of macroeconomic policies, it is
not the impact of the problems faced by the financial system in the country is limited to the border country,
but has approved this influence extends to the foreign markets in the world.
Efforts of the Basel Committee for the development of banking supervision:
The theme of bank capital adequacy has acquired major importance in recent years in light of the financial
and banking developments and the rapid opening of markets in industrialized countries, which served to
consolidate control regimes and the development of the minimum capital of banks in an attempt to curb
unfair competition in the global banking market by the Japanese banks to European and American banks
because of the low proportion of their capital assets. These developments have been accompanied by the
desire of industrial nations in the transition to avoid the risks of banking work either from each other or
from other States as we have already stated after escalating risks arising from credit operations and the
worsening of the external debt crisis and the decline of some developing nations to meet the burden of
those debts, which in effect negative on the bank borrowings at the international level and instability in the
global banking system.
The Basel Committee issued for the control of the banks many of the recommendations that contribute to
the improvement of technical methods for the control of the banks so that banking commensurate with the
twenty-first century is what these recommendations issued by the Commission in 1999 m on the
requirements to be met for effective banking supervision and the basic principles for the exercise of such
control Many of the issues on the management of credit risks, and recently issued standards on
Basel(National Bank of Egypt,2001).
These recommendations will create significant challenges for financial institutions and banking, rating
agencies and regulators, and global capital markets, and the level of organization, operation and risk
management. These challenges are summarized as follows (National Bank of Egypt, 2001):
Banks must apply an institutional framework for a comprehensive risk management links between
regulatory capital and economic capital.

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The challenges imposed by the new agreement will not include non-banking financial institutions, but they
may be forced to apply the criteria and guidance so as to maintain their competitiveness in the market.
Dealers with banks will need to collect, and disclose new information, and this may lead to increased
transparency deal to create new formulations of the risks to these clients.
Rating agencies will face new challenges in light of the criteria set out in the new agreement and the
importance addressed by these agencies.
Organizers should adhere to a certain level of regulatory practices and policies are equal to those used by
legislators in different countries according to the recommendations of the Basel Committee.
Comprehensive banks may shift to securitization in the financial institutions in response to the
requirements of Basel.
The complexities imposed by the new agreement, and local regulatory frameworks in different countries
made the application of the Basel a highly complex task. The process of applying the new standards by
banks will depend on the restructuring of its risk management as strategies and means to identify the
minimum requirements for capital and information requirements of clients and market participants, and
information technology systems and through alternatives disciplined and vehicles, banks can begin to
benefit from improved risk management and reduced requirements for the top money, that these changes in
turn will affect the strategies of banks, and the relationship with clients, in the long run, will affect the
business models banks in general. The minimum requirements for capital will be the effects on the implicit
risk management and thus on the institutional governance in the banks, and therefore the focus of banking
institutions at all aspects of the agreement vested benefit from the opportunities offered by important for
securing global banking environment safe and secure(Shalaby, M.,2005).
Basic requirements to be met for the exercise of effective banking Control:
The Basel Committee indicated that banking control is part of an integrated system that helps to achieve
financial stability. This system consists of the following five elements (Shalaby, M., 2005): Stable and
sound macroeconomic policies, A developed infrastructure that includes: Laws regulating companies, and
consumer protection and private property, Internationally recognized accounting rules and principles, An
independent system for reviewing the budgets of companies with significant size, Effective banking
control, as will be discussed in detail later on, Specific rules for regulating the work of financial institutions
other than banks, and A system for settling payments. Effective Market Discipline, which depends on the
flow of information from borrowers to investors and creditors. The lack of government intervention in
industry decisions of the parties and in particular the granting of credit. Validity of the regulatory authority
to take corrective action to remove the defaulting banks or restructuring / liquidation of these banks in
critical situations. A mechanism for providing an appropriate level of government intervention aimed at
protecting the banking system when exposed to systemic obstacles.
Principles of the Basel Committee for Effective Banking Control: The Basel Committee has prepared two
documents: one is a comprehensive set of basic principles for effective banking supervision (Basel Core
Principles Basle Core Principles of Banking Supervision) which can be applied in the Group of Ten and
other countries, and the second contains the summary of recommendations and standards frameworks
Committee already in place. The basic principles of the Basel Committee include 25 principles, covering all
aspects of banking supervision and fall of these principles in 7 major groups. They are (Zayed, H., 2003):
The conditions to be met for the application of effective banking control system: Every institution subject
to this system must have: Specific and clear responsibilities and goals, Autonomous administration, as well
as availability of adequate financial resources, The existence of a legal framework for banking supervision,
and An information exchange system (based on trust) between the institution and controllers.
Granting the licenses and infrastructure required for banks: The activities allowed for the institutions which
are subject to the regulatory system must be determined, and institution must not be called a bank unless it
already practices banking work. Licensure authorities have the right to approve the bank or reject any
requests for the establishment of banks, if they do not comply with the standards set. Banking controllers

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must have sufficient authority to review and reject any proposals to transfer ownership of the bank.
Banking controllers must be given to the authority to set standards for reviewing acquisitions and
investments in banks, and to make sure that they do not represent risks to the bank or impede effective
control.
Control and effective requirements (Zayed, H., 2003): Banking controllers must define the minimum
requirements of the bank's capital and its components and its ability to absorb losses, given that these
requirements must not be less than is specified in accordance with the capital adequacy standard.
Autonomy of the control system in its assessment of the bank's policies and procedures associated with the
granting and management of loan and investment portfolios and implementation. Controllers must make
sure that banks adopt adequate policies and effective measures to assess the quality of assets, as well as the
existence of adequate provisions to offset default loans as well as the availability of adequate reserves.
Methods of continuous banking control (MisrBank, ResearchCenter, 2002): Effective banking control must
combine internal control and external control. The ability of controllers to monitor the banking system as a
whole is a fundamental element of banking control.
Information needs (availability of information): Controllers must make sure that every bank keeps adequate
records of accounting policies and applications which can be controlled to obtain insight of the financial
situation of the bank and the results of its work they must also make sure that the bank deploys budgets that
reflect its financial position on a regular basis.
Official authorities of controllers: Controllers must have official authorities to enable them to take adequate
corrective actions to review the bank failed to abide by one of the control measures such as the availability
of minimum capital adequacy, or when violations occur on a regular basis, or in the event of a threat to
depositors funds in any way.
Banking operations across borders: Controllers must apply unified global control, and use prudent
regulatory models for all matters relating to banking work on a global scale, and in particular for the
branches of foreign banks (Hefny,A.,&Abu-Qahf,A.2000).Unified control requires the presence of
communication channels and exchanging information with various controllers involved in the controlling
process, mainly in the host country. Controllers must ask foreign banks operating in the host country to
perform their work with the same high levels of performance required by local banks and force them to
provide the information required to have unified control.
There is no doubt that the presence of a strong banking system requires effective control of its units, and as
comprehensive in the basic principles outlined above. The safety of the banking system supports the
economic environment in general, the banking system plays a key role Seville implementation of payments
for all transactions in the mobilization and allocation of national savings and the importance of banking
supervision is to ensure that banking units operate properly and to reduce health risks and that their
property rights (capital and reserves) and Apportionment (Provisions) adequate to cover the risks it faces.
With the overall control of the effective macro-economic policies and effective. There is a basis for
financial stability effectively. On the other hand, it is important to supervise the banking risk assessment of
each bank individually and to ensure that devices based on the supervision of their human resources
required for this evaluation and implementation of procedures required for any repairs required, the most
important of the existence of an adequate level of capital, and management of strong banking system and
an effective internal control and accounting records sound prepared to international accounting standards.
This has been the Basel Committee announced that it would follow up the application of those principles by
various countries, especially in emerging economies, as announced by the International Monetary Fund to
maintain the integrity of the banking system must come at the forefront of the objectives of the banking
authorities in the world (Zayed,H.,2003).
Governance and its Role in the Egyptian Banking System: Governance in the banking system means
monitoring performance by the board of directors and top management of the bank and protect the rights of
shareholders and depositors, in addition to interest relationship these external actors, as determined by the
regulatory framework and powers of the regulatory body, apply governance in the banking system to public

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banks and private banks and joint, and is key elements in the process of governance in the two groups, the
first group of internal actors who are shareholders and the Board of Directors and Executive Management,
observers and internal auditors, and the second group is to players outside representatives to the depositors,
and the deposit insurance fund, the media and companies classification and credit evaluation, in addition to
the legal framework the regulatory and supervisory, and the fundamental pillars that must be met to
complete the provisions of effective control over bank performance summarized in transparency and the
availability of information and the application of international accounting standards and to upgrade human
skills through training(Abul-Eyoun,M.2003).
The success of governance in the banking system does not only depend on setting regulatory rule, but it
also needs to be applied correctly and this depends on the Central Bank and control on the one hand and on
the bank and its management on the other, which must be convinced of the importance of the bank such
rules and controls, which help to implement. This reveals the role of the Board of directors executive and
non-executive committees that provide follow him the necessary data on the performance of the bank and
the inspection departments in the banking system, which presented their reports to the Board of directors
and the shareholders who must do their part in monitoring the performance of the bank by contributing to
the provision capital Bank in the event of need, and the proper exercise of public governance lead to the
support and safety of the banking system, through the standards set by the "Basel Committee" for the
control of banks and the regulation and control of the banking industry, of which the most important are the
following(Abul-Eyoun,M.2003):The announcement of the strategic objectives of the banking system and to
define the responsibilities of bank management. Checking the efficiency of the members of the board of
directors and the full understanding of the concept of governance, and the absence of deliberate errors by
top management. Ensuring the effectiveness of the role of controllers and their awareness of the importance
of their controlling role. The need for transparency and disclosure in all the work and activities of the bank
and management.
We note that the Central Bank has taken a number of actions in the light of the basic rules approved by the
Basel Committee. The legal, regulatory and controlling framework of the work of the Central Bank of
Egypt includes the setting of rules for the prudent control of the work of banks, including determining the
size and area of activity of each bank and the ratios of its liquidity and reserve and controlling the
application of the capital adequacy criterion. The CBE decided to increase this ratio from 8% to 10%,
asking banks to comply with it by no later than March, 30 2003. In this context, the CBE paid attention to
the method of classifying assets and determining appropriate provisions for each category of them as
banking safety is achieved when the classification is done in a proper way. It also paid attention to the
criterion of the concentration of loans to one client or one currency to protect the bank from the fluctuations
that can occur in any of these categories. It also paid attention to lending to related and relevant parties,
who could cause crises to the banking system. In this connection, the CBE, in November 2002, made a
decision requiring dealing with this type of lending cautiously, and success of governance in the banking
system requires the existence of some sort of punishment when a mistake is made and the existence of a
mechanism for correcting errors (Adib, Emad, 2003).
The Challenges Facing Banking System under Financial Globalization: It is expected during the next few
years that banks will face significant changes, as well as a number of strategic issues as a result of the
increasing influence of the following main strong forces(Ibrahim M.,1999):
Tendency for internationalization: Internationalization mean increased cooperation among nations and
different institutions located those States in the economic sphere, and notes that the internationalization has
three important implications in a number of states, and those three effects led to the following(Ibrahim
M.,1999): Increased importance of assets and liabilities in foreign and domestic banks.
Increased number of banks and financial institutions operating in foreign markets, banking locally.
Increased assets of foreign banks operating in the local banking markets. At present, there are a number of
indications that foreign banks will pose a threat to local banking markets, in Europe, for example, in the
next few years, it is expected that large foreign banks will only constitute the main threat competitive in the
market for retail banking ( Retail Banking Market) as long as the opportunity is available, and the foreign
banks have the ability to monopolize (Acquire) for financial institutions with large clients (Large
Customers Bases).

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internationalization: This is a major banking development that emerged in Europe, then in many countries
of the world during the past two decades, since banks in those countries started to keep away from
specialization in banking and reduce the emphasis on traditional forms of lending and investment. Thus the
bank came to provide a comprehensive mix of financial services (Abdel-Hafez, M.,2001). Accordingly, in
all parts of Europe now, banks are moving towards global banking systems, which enable them to exercise
their activity in the markets had previously been prohibited, as the pace of erosion commas between
traditional banking work and other services is a reflection of the erosion that coincided commas in the
international capital markets, particularly markets banking and finance markets financing through bonds, in
addition to the phenomenon of securitization will continuously feed the decay and collapse of the
demarcation lines between banking and capital markets and exchange markets(Abdel-Hafez,M., 2001).
Securitization: This phenomenon emerged in the seventies and eighties, and now constitutes one of the
most important features of international capital markets, and that the term "securitization" mainly refers to
the transfer of assets or change the format to the external financial assets and so can be re-sold to investors
in the money markets(Rady, A., 2003), and this has created the phenomenon of "securitization" in the
banks that have lost their comparative advantage compared with the stock markets, in the area of financial
intermediation in the international credits also bore "securitization" with a meaningful change in the role
played by Bankers since profitability is now transformed from being dependent on the conduct of studies
and research regarding the interest rate margin, to focus towards income from commissions on activities for
the provision of debt instruments) to investors.
Globalization: Globalization refers to the unification and integration of global markets for both capital and
money markets, i.e., unification and integration of financial markets globally, through the swaps
mechanism and arbitraging accompanying for differences in international prices that have led globalization
the possibility that banks and other financial institutions management Governor international investments
(Global Investment Portfolios), as well as the full and comprehensive series of products and new methods
become available now, so that the main players in the market (international financial institutions) carry out
their activities in the various financial markets throughout the world, at the same time, i.e.,
simultaneously(world bank,2001).
Conglomeration: Due to a number of factors and variables in each of the market of financial services as
well as global economic environment, it is expected in the future that provide financial services through
four major types of institutions: the groupings (conglomerates), and specialists, and agents (Agents), and
institutions that operate under the umbrella of privilege from another institution (Franchisers)(world
bank,2001).Conglomeration is perhaps the most important trend appropriate for banking work in many
countries around the world and probably the "assembly and integration features identified and acquired the
distinctive characteristics and attributes through the desire of banks, which operate on a large scale to
maintain its presence globally. It is noted that a large number of mergers (Mergers), as well as operations
control (Takeovers) in the European financial services market was in 1986, and this can be said that most of
the main reasons that explain the occurrence of mergers and control, due to the motives Strategy (Strategic
Motives), and associated with diversification (Diversification), as well as economic motives related to
synergy and growth.
Concentration: Concentration in banking markets is also one of the important features of the structural
changes in the world of banks, and concentration is not in any way a recent phenomenon, since the banking
systems in many countries in the world, dominated and controlled by a few big banks, since at least half a
century. Banking systems differ in competitive degree of concentration (El-Naggar, F. 2000).
As for the most common way to measure the concentration banking is dependent on the calculation of the
proportion of assets or deposits in the banking sector and State-controlled and managed by the three largest
banks, or five, but it should be noted that there is difficulty in accurately assess both the effectiveness and
extent of concentration within systems bank alone, and it also became difficult to measure the
concentration significantly banking contemporary measures, because of lack of clear lines between labor
markets banking and financial markets other, and yet it is clear that there is a tendency to prefer the large
size of many banks a large number of the world's countries.

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In the end we can summary these Challenges as following (El-Alem, M., 2004):
Global Changes: Global changes occurred successively in the form of shocks that had a significant impact
on banks and other institutions. Among the most important of these changes are the electronics revolution,
and economic blocs, and the emergence of the new world order, and control of the market economy, the
information revolution, and the Liberation of world trade, and increased competition, and the spread of the
phenomenon of privatization, mergers between banks and the Basel agreement issued in 1988 on the banks.
Information and Communications Technology: Computers have become available and their speed and
potential increased, and they entered into networks that can connect with one another in audio, image and
movement. The use of computer systems to summon immediate decisions and upgrade management skills
with the availability of information. The computer systems are also used in external oversight of
performance in different locations.
Through modern communication technology traders and staff in the banks could work through their e-mail
and thus can be contacted and complete the work without the personal presence at the headquarters of the
bank. Become driven by the banks to go global because of the serious financial accumulation negotiable
move from one State to another as soon as the light effective global communications technology that allows
the transfer of funds and investment anywhere in the world in minutes.
Competition and the Global Market: Global changes forced banks and other institutions to compete with
one another. At the same time, large blocks appeared to expand the scope of the market before and reduce
cost and maximize profit through service, speed, innovation and meet the needs of the consumer. In order
to achieve these objectives, the value of knowledge as an important factor of production (El-Alem, M.,
2004). In order to be competitive and put in a data base available for use in banks and institutions in the
light of fierce competition require conversion strategies to expand geographically and to open new markets
and the challenge of competitors.
The change in the operating style: Now banks look at the human element on the basis of providing selfcommitment and the alleviation of restrictions and a regulation imposed on workers and has become a
focus on self-directed work teams in achieving goals. It was necessary to have leadership that rely on
human allow shared vision among all workers, believes decentralization to achieve accomplishments and
drive material and intended merit systems through the development of operating systems quick and
disciplined(Hefny,A.,&Abu-Qahf, A.2000).
Basel Accord on the banking blanket: The agreement mainly aims to achieve this kind of international
consensus regarding the regulations on the adequacy of bank regulatory capital, which leads to the safety
and stability of the international banking system by hand, and to achieve justice in the international banking
arena of competition on the other. This agreement is based on the application of a set of standards for the
provision of capital adequacy of banks and making capital to reach assets and liabilities weighted by risk to
8 %( Zayed, H., 2003).
In accordance with decisions of the Basel Committee, countries of the world have been classified into
countries with low risks including the industrialized member countries of the Organization for Economic
Cooperation and Development plus Switzerland and Saudi Arabia, and countries with high risks including
the rest of the world.
The resolutions issued by the Basel Committee drew attention to the future of the banking system in Egypt
and other Arab countries and to the actions to be taken to adapt to developments on the international scene.
Local changes: The economic reform program: Since the mid-seventies Egypt has witnessed a
comprehensive movement of restructuring of its economy, particularly the adoption of economic reform
programs aimed at deregulation of economic activities that impede their growth through free rein to market
forces to play their role, and was one of the most important reform measures Liberation of the national
currency, the abolition of exchange controls, The Liberation of interest rates, the Liberation of foreign trade,
Liberation of prices for goods and services, especially agricultural commodities, the application of tax
reform and the development of financial markets, and reducing the role of the state in economic activity

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through a policy of reform and the privatization of the public sector, in addition to actions aimed at
improving the investment climate and attract national and foreign investments.
The effect of all this and its implications on the banking system in various forms and images of increased
responsibilities in implementing and supporting economic reform programs, which also requests liberates
the development and management functions and providing high efficiency is also taking into account the
impact of global changes mentioned above(Kassem, M.,1998).
The privatization of the public sector: The privatization process aimed at enhancing the efficiency of the
national economy through management style approach the private sector in its activity, which achieve a
greater financial resources available to the government due to conduct a sale in some units owned and lead
to the retreat of the responsibility the state budget for financing investments, and increase productivity the
quantity and quality of the availability of better methods of management(Gomaa,F., 2000).The methods of
privatization range from offering all or part of the shares for sale to the public, which is known as "public
tender", or presentation to a group of investors and this method is defined as " private tender" Privatization
may be through increased capital established by the State with retaining majority ownership. Having sold
parts of the company, or are leasing the business or some of its assets to others. There is no doubt that the
promotion and organization dealing in the stock market is an important factor that will help the success of
the privatization program. The banks played important roles in the success of the privatization program
through (Capriog. and C., 2000):
Solving the problems of the debts of the public sector companies by granting grace periods and / or
capitalizing debt and interest in companies, rescheduling debt and / or granting loans to support them. The
contribution of banks in reviving the capital market through the financing of the purchase of shares and
grant funding under its guarantee, the provision of information and data required for Corporations sale and
promotion at home and abroad.
Playing the role of the seller of the shares which he has in companies, and / or acting as the buyer of certain
stocks
of
companies
sold
for
different
objectives.
Bank and Credit Laws : Taking into account the global and local variables were the most important
legislation multiple comprehensive law of the Central Bank and the banking system, monetary contains
many rules and requirements that entailed(Abu Gahf, A.,2005):
Examining the conditions of banks to take necessary update on the capital adequacy requirements of the
standard of banks and thus to re-examine the structure of assets for the benefit of lower-risk, the resort to
increase capital to meet the minimum requirement in accordance with the law. The application of safety
standards designed financial positions of banks and the development of systems and accounting rules in
line with the requirements of the Central Bank.
Paying attention to the various aspects of the qualitative development of the banking law and the emphasis
on the need to upgrade the management of the banks, and the level of human cadres, and accommodate
modern banking techniques, so that they can keep up with what used by the financial markets and banking
institutions from financial instruments at attracting funds and employment, according to the latest methods
of harmonizing considerations security, liquidity and profitability.
Management of credit risk, taking into account the fact that the non-observance of standards of the Basel
Committee will adversely affect the external lines of credit and hinders the flow of investments and
financial resources into the countries that ignore their application, which in turn leads to obstruct
development plans and economic reform programs.
Change of banking and credit policies: The developments undergone by the Egyptian economy affected the
course of the banking sector, and as a result considerations required by economic liberation emerged,
according to which it was seen banks have the right to determine debit and credit interest rate and the need
arose to increase credit to finance private investment. Banks had to go to areas they were allowed to go
before when they were forced to exercise the functions of investment banks, and then enter the retail
operations to expand the market(El-Antary, S., 2001).

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Meeting global and local challenges: Through a review of the most important global and local changes and
their impact on the banks, we can say that the most important challenges facing the banks are as follows
(Abdel-Hafez,M.,2001): First: Assessing the risks related to the change of product mix with increased
competition. Second: Obtaining the resources needed, especially human resources for the exercise of
outstanding jobs and new roles and the requirements of the application of banking legislation.
Third: Obtaining better operational results so that profitability may be the basic element for measuring the
efficiency of performance. To achieve these broad objectives, we must consider the following (El-Baz, H.,
2003):
Identifying the banking strategy which should seek for sectors in which the bank has a comparative
advantage, and those in which these advantages may develop so that they become relative later on.
Expanding the product mix and banking services continuously so that they may become integrated and
convenient to customers, rather than relying on traditional financial services that achieve profit margins
narrow. Effective control of costs through more effective control. Restructuring banks, taking into account
the rapid development of technology, so management can approach the levels of marketing banking, and
focus on the promotion of banking services is the principal challenge in the future. Managing risks in
lending operations to meet the rapid changes in positions of debtors with emphasis on the importance of
policies for the management of assets and liabilities.
The strategy for facing challenges is based on the following (El-Alem, M., 2004):
Providing minimum capital of the bank in accordance with the criteria set. Restructuring public sector
banks, Adjusting bad loans, Merging small banks in strong banks, Disseminating the culture of risk
management developed between banks, and expanding and deepening banking and financing services
(comprehensive banks , Contributing to the development of the financial market ,and Support control
systems and procedures for monitoring and evaluation of performance.
Results and Recommendations: In the light of the foregoing, the researcher can conclude some results, the
most important of which are the following:
The banking sector is one of the most important economic sectors and the most influential and responsive
to changes, whether international or domestic, those changes include technological developments, the
internationality of money markets, and freedom from the constraints that hinder all banking activities.
And attracting investments to get the financial resources required for developmental needs. Egypt has paid
great attention to the reform of the banking system through merging and possession to face banking
competition within the framework of financial globalization, expanding the capital base of corporate banks
and restructuring banks to keep up with international developments. Despite the measures Egypt took to
reform and enhance and restructure the banking system, the profits achieved by banks are still low. Also,
the contribution of the financial sector in the gross domestic product remained low (8.3% in 2007). With
increasing globalization, banking work became exposed to risks whether external or internal factors and
banks had to be causation about risks using several means, the most significant of which is strengthening
capital. Merging leads to the achievement of economies of scale and increases the volume of activity and
savings and reduce the costs of the activity and mergers and acquisition leads to a change in bank
management and the selection of leaders to pursue more efficient and modern management methods which
leads to lower costs and increase profits. The success of governance in the banking system does not only
depend on setting regulatory rule, but it also needs to be applied correctly and this depends on the Central
Bank and control on the one hand and on the bank and its management on the other. It is expected during
the next few years that banks will face significant changes, as well as a number of strategic issues as a
result of the increasing influence of the different strong forces under financial globaliziation. In the light of
the above results, the study recommends the following:

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Benefiting by the models of central banks which are highly autonomous through information
communication, on-going training, participation in international banking conferences, and increasing
overseas missions and scholarships to get acquainted with new developments in banking systems.
Developing the skills of those in charge of credit and selecting the best of them from among those who are
efficient, well-reputed and highly experienced in the field of banking, and stopping political appointments
in the banking sector, taking into consideration on-going training of banking cadres to get acquainted with
the latest developments in banking work, especially in the field of credit, through seeking the assistance of
specialized experts whether from Egypt or abroad, and activating the overseas training scholarship system
to benefit by international experiences.
To face international competition, commercial banks in Egypt must work to know all details about the
banking market needs in such a way as to not to conflict with the goals of the banks. They must also know
the nature of competition which banks face. Reinforcing the financial resources of Egyptian commercial
banks through increasing capital and merging small and weak banks to form more effective units in order to
achieve the required reduction in costs and benefit by larger economies. Working to develop human
resources through rehabilitation and training in such a way as to fit with the developmental process and the
requirements of modern banking technology. Implementing a modern banking technology and introducing
modern services and products to deliver those services to clients in the local market.

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