New Egypt Central Bank Ruling A Blow For Local Money Market Funds

Egypt’s central bank, worried that banks are investing too much of their cash in local money market and fixed income funds, is imposing stricter limits on such investments, a move asset managers say could cripple their industry.

In a copy of a central bank directive obtained by Reuters, the central bank says banks will not be able to invest more than 2 percent of their tier-one capital in local money market and fixed-income funds, down from 5 percent at present.

A central bank official said that some banks’ investments in these funds had approached the size of their entire loan portfolio.

“It’s something that any central bank would be worried about,” the official, who asked not to be named, told Reuters by telephone.

“We don’t regulate these companies, we don’t supervise these companies, and they (the banks) leave this amount of money to be managed by these companies,” the official said.

The bank’s directive, dated May 9, has been circulated to banks but does not say when it would come into effect.

Around eight local financial institutions offer money market and fixed income funds, with combined assets of around 70 billion Egyptian pounds ($10 billion), local asset managers say.

The funds are regulated by the Egyptian Financial Supervisory Authority (EFSA), which could not be immediately reached for comment.

Fund managers said they would be starved of business once the new rule takes effect.

“It will cause huge damage to a 60 or 70 billion (pound) industry,” said Ahmed Abou Saad, chairman of Rasmala Egypt Asset Management, which manages about 2.0 billion pounds of money market and fixed income funds.

The new ruling also limits the amount of funds invested in all money market and fixed income funds to no more than 7.5 percent of a bank’s total local currency deposits.

Banks exceeding these limits must stop issuing any new investment certificates until their funds shrink to the new limits.

FUND MANAGERS WILL BE HIT

The biggest money market manager in Egypt – and which stands to lose the most from the new limit – is Beltone Capital , which had 32 billion pounds under management at the end of 2012, almost all of which was in money market or fixed income funds.

One of Beltone’s clients, Egypt’s second-largest bank, state-owned Banque Misr, has more than 20 billion pounds in money market and fixed income funds, according to the central bank.

The head of Beltone, Aladdin Saba, did not respond to a request for comment.

Most of the money invested by the funds goes into government securities at high interest rates, and fund managers speculated the central bank may be trying to bring down government borrowing costs by forcing people to place their money in deposits at commercial banks rather than channel it through money market funds offered by the banks.

“The funds would move back to banks, which would have to put 10 percent with the central bank as (statutory) reserves at zero interest, which might benefit the central bank,” said Mohamed el Sherbini, head of money market and fixed income at CI Capital.

CI Capital, which is a subsidiary of Commercial International Bank, is Egypt’s second-biggest money market fund manager with 8.5 billion pounds of assets under management.

Many Egyptian banks have been making record profits by lending to the government, whose borrowing costs have soared in the two years since president Hosni Mubarak was ousted in a popular uprising.

Demands by civil servants for higher wages and a stagnant economy that has eaten into public revenues have widened the state budget deficit to about 11.5 percent of gross domestic product, forcing the government to turn to domestic banks for financing.

“The net interest margin for the banks is huge. They will make a bigger profit when investing this money in treasury bills and bonds. Banks using funds make less than 1 percent,” Sherbini said.

Rasmala’s Abou Saad said that any contraction of the money market industry would decrease the options and the number of products for both investors and borrowers. ($1 = 6.9645 Egyptian pounds)

Reuters