Improving Capital and Financial Markets Efficiency presented by François-Jude Pépin Deputy Chief of Party and corporate finance lawyer USAID Egypt Financial Services project 17 May 2006 GAFI, Cairo OECD National Investment Reform Workshop

2 GOE and USAID capital and financial market programs Goal strengthen the environment for trade and investment by modernizing the financial sector through a reform of commercial financial institutions and the introduction of new financial products in the market CMD project strengthened institutional capacity and regulatory environment, improved market automation for operational stability TAPR II project financial reform and capital market capacity building EFS project new financial instruments

3 Egypt Financial Services project (“EFS”) of MOI / USAID Assist public and private sectors to create a dynamic private sector lending industry by improving market efficiency, in order to expand home ownership and business opportunities for the benefit of the Egyptian society. primary and secondary mortgage finance markets new financial instruments: factoring, leasing, expanding availability of fixed income instruments, securitization

4 EFS financial sector issues and objectives Issues resources of financial system concentrated in banks no system to collateralize banks loans with moveable property marginal contribution of non-bank finance institutions to channel capital capital market not a provider of long-term finance narrow range of efficient financial instruments Objectives secondary mortgage market supports long-term fund MBS and real estate bonds non-bank and low-cost sources of finance to businesses with:  new financial instruments for borrowers and lenders: long and short-term debt securities, leasing, factoring, and new institutional investors  secured lending, foreclosure

5 Remarkable successes of Egypt capital market infrastructure CASE – trading volumes, rules MCDR – settlement volumes, T+2, no defaults, registry, dematerialization smooth uninterrupted operations, investor confidence legal foundation – CML, depository, bond dealers, securitization CMA leadership, SRO agenda, restructuring MOF/CBE: auction of GOE securities for real market rate, dematerialized T-Bills in CBE registry and bonds in MCDR, Primary Dealer system

6 GOE - USAID targeted interventions to adopt international best practices to develop capital market Capitalize on Egypt’s solid and reputable capital market infrastructure Ministry of Investment Capital Market Authority: capital market’s options to productively channel investments (new investment securities) Mortgage Finance Authority: secondary mortgage market ELF GAFI: leasing, factoring MOJ and judiciary: secured lending collateral registry and foreclosure Ministry of Finance: GOE bonds, bills – corporate bonds benchmark

7 EFS New financial instruments strategy Increased transparency and improved investor confidence Broader range of financial instruments Facilitate both domestic savings and international investments into productive enterprise Mobilization of longer term investment of funds of insurance and pension funds

8 Investment Program Objectives for the financial sector Investment reform in key policy areas challenge of “becoming leading market in MENA” was impetus for reform of CASE, MCDR, laws: next challenge? nascent, manipulative, speculative, mature market – overcome the speculative stage (lacking informed investment decisions, not based on rising prices and volumes / proper disclosure, not “insider market” / professional advisors and mutual funds in short supply improve competitive attitude of players in financial sector (bank Primary Dealers function, banks’ credit bureau services) concerted GOE effort to improve all relevant sectors to free up constraints on roles of private sector (laws, enforcement, judiciary)

9 support market forces and financial intermediaries instead of requiring bank/insurance company participation in non-bank sectors (margin trading, factoring) implement IOSCO, BIS, G-30 best practices (bankruptcy and capital markets, BASEL II real estate loans portfolio) GOE/ donor or counterpart/contractor jointly track progress to avoid “shelved-report-frustration” regulation driven by “need to protect” and international best standards (disclosure – “rotten eggs” and junk bonds), not “merit approach”

10 Investment Program Objectives: looking at the capital market Attractiveness as destination for investment promote market infrastructure: laws, CASE and MCDR and investment culture, domestically and abroad diversify investment securities for domestic and foreign investors, constant supply, shorter/longer maturities periodically (5-7 year) drive reform, with private sector, to maintain financial sector infrastructure (laws, institutions) relevant and competitive private sector to more fully play its role: association to strengthen and promote industry and reputation

11 pursue public awareness an important support component: investors on rights and risks, financial press, government bodies, judiciary improve market behavior through education/training and laws/published sanctions Exchange experience of reform and economic diversification on development of capital and financial markets, outside the banking sector implementing international standards and on benefits sharing regulatory burden with SROs