Bank credit to Egypt's private sector decreased over the last decade, despite a recapitalized banking system and high rates of economic growth. Recent macro-economic turmoil has reinforced the trend. This paper explains the decrease based on credit supply and demand considerations by: (1) presenting stylized facts regarding the evolution of the banks' sources and fund use in 2005 to 2011, noting two different cycles of external capital flows, and (2) estimating private credit supply and demand equations using quarterly data from 1998 to 2011. The system of simultaneous equations is estimated both assuming continuous market clearing and allowing for transitory price rigidity entailing market disequilibrium. The main results are robust to the market clearing assumption. During the global financial crisis, a significant capital outflow stalled bank deposit growth, which in turn affected the private sector's credit supply. At the same time, the banking sector increased credit to the government. Both factors reduced the private sector's credit supply during the period under study. After the trough of the global crisis, capital flowed back into Egypt and deposit growth stopped being a drag on the supply side, but bank credit to the government continued to drive the decrease in the private sector's credit supply. Beginning in the final quarter of 2010, capital flows reversed in tandem with global capital markets, and in January 2011 the popular uprising that ousted President Hosni Mubarak added an Egypt-specific shock that accentuated the outflow. Lending capacity dragged again, accounting for 10 percent of the estimated fall in private credit. Credit to the government continued to drain resources, accounting for 70 - 80 percent of the estimated total decline. Reduced economic activity contributed around 15 percent of the total fall in credit. The relative importance of these factors contrasts with that of the preceding capital inflow period, when credit to the government accounted for 54 percent of the estimated fall, while demand factors accounted for a similar percentage.
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Autor
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Data do documento
2013/04/09
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TIpo de documento
Artigo de revista
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No. do relatório
79452
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Nº do volume
1
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Total Volume(s)
1
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País
Egito, República Árabe do
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Região
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Data de divulgação
2016/04/09
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Disclosure Status
Disclosed
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Nome do documento
Why don't banks lend to Egypt's private sector?
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Palavras-chave
banking sector;t-bill rate;credit supply;stock market index;marginal density;Bank Credit;industrial production;disequilibrium model;lending rate;net foreign liabilities;net credit position;demand for credit;capital flow;capital outflow;global financial crisis;maximum likelihood method;role of bank;alternative sources of financing;external capital flows;global capital market;credit demand;Capital Inflows;banking system;banking sector reform;impact of credit;foreign currency asset;Capital Adequacy Ratio;supply function;real credit;density function;alternative funding;explanatory variable;consumer price index;cumulative distribution function;lending interest rate;deposit interest rate;commercial loan market;Merger and Acquisitions;bank lending rate;lack of alternative;sources of fund;net external liability;capital inflow episode;demand for bank;aggregate time series;public finance deficit;private sector credit;quality control mechanism;bank deposit growth;reduced form equation;private sector lending;high growth rate;source of funding;equilibrium credit rationing;degrees of freedom;statistics and information;monte carlo simulation;supply of credit;transmission of shocks;adverse selection problem;
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