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World Development Vol. xx, No. x, pp. xxx–xxx, 2007 2007 Published by Elsevier Ltd. 0305-750X/$ - see front matter

doi:10.1016/j.worlddev.2006.07.002

Privatization, State Ownership, and

Bank Performance in Egypt

MOHAMMED OMRAN *

Arab Academy for Science and Technology, Alexandria, Egypt

Middle East and Central Asia Department, Washington, DC, USA

Summary. In this study, we address the financial and operating performance of a sample of 12

Egyptian banks from 1996 to 1999, during which time control was transferred from the state to the

private sector. Following privatization, the results indicate that some profitability and liquidity ra-

tios for privatized banks decline significantly, but other performance measures are virtually un-

changed. Antithetically, the results indicate that the relative performance changes of privatized

banks were better than those of mixed banks with majority state ownership but worse than those

of banks with other ownership forms (private, state-owned, and mixed private ownership). How-

ever, the study finds a strong evidence to support the theory and previous empirical findings that

banks with greater private ownership perform better.

2007 Published by Elsevier Ltd.

JEL classification — G21, G32, L33

Key words — state ownership, banks, privatization, financial performance, MENA, Egypt

20

1. INTRODUCTION

In many developing countries where banks

are still state controlled, we see that the ineffi-

cient and often politically motivated use of

the banking sector eventually frustrates efforts

toward achieving economic development. Un-

like the impact of privatization on the financial

and operating performance of non-financial

state-owned enterprises (SOEs), which has been

extensively studied, the impact of bank privati-

zation has been insufficiently researched.

As is the case in many emerging markets, 46

47

banks in Egypt are the dominant financial insti-

tutions—they control most of the money flow 48

and possess most of the financial assets. Conse- 49

quently, the issue of bank privatization is 50

important to the Egyptian economy, in particu- 51

lar because there is an ongoing discussion 52

about the quality of Egypt’s bank loans, invest- 53

ment portfolios, and sufficiency of reserves. 54

Since the economics of privatization is a 55

broad topic, we had to limit the scope of our 56

investigation. 1 We intend to focus only on 57

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32

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45 ers in this region.

As we will see in Section 3, the theoretical

examining whether privatization improves the 58

and empirical work conducted thus far on bank

bank performance and thus, if any of the bene-

59

privatization has been limited. Little is known

fits of privatization predicted by economic the-

60

about the bank privatization process and what

ory are achieved. If transferring control from 61

is known comes mainly from transitional econ-

the state to the private sector affects perfor- 62

omies and Latin American countries. The liter-

mance, we expect to see changes in various 63

ature is limited on this issue in other regions

accounting measures for these privatized 64

such as the Middle East and North Africa

banks. More precisely, (i) we examine how 65

(MENA), although there are some studies on

banks perform post-privatization versus pre- 66

the impact of privatization on the performance

of non-financial firms in Egypt ( Omran, 2004a,

2004b, 2005 ). As such, we believe that a study

on bank privatization in a MENA country is

very important for researchers and policy mak-

* The author gratefully acknowledges Miss Ayten Fete-

heldin at the Economic Policy Institute of the Arab

Monetary Fund for her excellent research assistance. Final revision accepted: July 14, 2006.

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privatization (on an unadjusted basis); (ii) we

2. BACKGROUND OF THE BANK

123

68

test the performance changes in privatized

PRIVATIZATION PROCESS IN EGYPT

124

69

banks on a matched adjusted basis— private-

70

owned banks (PVBs), state-owned banks

Although the financial services sector in 125

71

(STBs), and combined-ownership banks with

Egypt is not as integrated as in developed mar- 126

72

majority private ownership banks (MPVBs) or

kets, it is relatively promising. Banking reform 127

73

majority state-ownership banks (MSTBs)—

has become a critical element of the economic 128

74

which allows us to examine the performance

reform program introduced in 1990 and the 129

75

changes irrespective of any industrywide fac-

Egyptian banking system has since entered yet 130

76

tors that may affect performance; and (iii) we

another phase of development. The reform pro- 131

77

also explore the post-privatization performance

gram involved the financial sector in several 132

78

of privatized banks, not performance changes,

ways, beginning with the elimination of the 133

79

versus other group counterparts. We then com-

repressive measures that had been in practice 134

80

plement the findings of this comparison by

since the early 1960s. Loan and deposit rates 135

81

employing several fixed-effect regressions over

were liberalized in January 1991, followed by 136

82

the entire study period to capture the impact

the removal of ceilings on bank loans to the pri- 137

83

of ownership structure on bank performance

vate sector in October 1992. Also, service fees 138

84

for all banks. By providing an extensive analy-

and bank charges were freed up; the reserve 139

85

sis on all banks, we should be able to draw the

requirement ratio was reduced; and majority 140

86

policy makers’ attention to the impact of own-

foreign ownership was permitted. However, de- 141

87

ership structure on bank performance and to

spite these advances, there is, as yet, no single 142

88

provide them with adequate information to

institution that offers a full range of financial 143

89

help them decide whether they should go fur-

products to its customers.

144

90

ther in the bank privatization process.

The banking sector in Egypt incorporates 28 145

91

Using a sample of 12 Egyptian joint-venture

commercial banks registered with the central 146

92

banks (JVBs) that were fully or partially priv-

bank of Egypt (CBE): four state-owned banks 147

93

atized from 1996 to 1999, the results indicate

and 24 private and JVBs. As for non-commer- 148

94

that some profitability and liquidity ratios de-

cial banks, they are segmented into business 149

95

clined significantly, whereas other performance

and investment banks (whose main activities 150

96

measures asset quality, capital risk indicators,

are, surprisingly, the same as those of commer- 151

97

operating efficiency, and asset growth show

cial banks) and specialized banks. There are 31 152

98

insignificant changes. At the same time, the rel-

banks of the former and only three of the latter, 153

99

ative performance changes of privatized banks

for a total of 34 non-commercial banks as of 154

100

compared to matched adjusted PVBs and

2002.

155

101

MPVBs indicate similar results. This is perva-

The privatization program in Egypt began in 156

102

sive particularly for profitability and efficiency

1991 as part of the country’s economic reform 157

103

indicators. Using MSTBs and STBs as bench-

program. Egypt’s 314 SOEs (non-financial 158

104

marks, we document that the relative perfor-

firms) were grouped under 27 holding compa- 159

105

mance changes of privatized banks are better

nies (reduced to 14 by 2001). Under the govern- 160

106

than MSTBs and worse than STBs. Neverthe-

ment’s strategy for the divestment of SOEs, 161

107

less, the results from post-privatization and

three approaches were initially undertaken. 162

108

the entire study period provide a strong evi-

The first was to sell shares through the domes- 163

109

dence that banks with higher private ownership

tic stock market, the second was to sell strategic 164

110

involvement are associated with a better perfor-

stakes of shares to anchor investors through 165

111

mance.

public auction, and the third was to sell firms 166

112

The remainder of the paper is organized into

to employee shareholder associations. In addi- 167

113

six sections. Section 2 provides a background

tion, some firms were liquidated because they 168

114

on the bank privatization process in Egypt. Sec-

were deemed not economically viable due to 169

115

tion 3 provides a summary of bank privatiza-

their enormous debt burdens. 2 The number

170

116

tion literature and the main findings of the

of Egyptian privatized firms, classified by 171

117

previous studies. The sample construction is de-

industry and method of sale, is given in the 172

118

scribed in Section 4, and in Section 5 the perfor-

Appendix .

173

119

mance measures and methodology used in this

With regard to the banking sector, the gov- 174

120

study are introduced and explained. The results

ernment controlled 30 banks: 23 JVBs; in which 175

121

are presented and discussed in Section 6 . Sec-

the state held at least a 51% share, and seven 176

122

tion 7 concludes the paper.

STBs (four are commercial banks and three 177

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PRIVATIZATION, STATE OWNERSHIP, ANDBANK PERFORMANCE IN EGYPT

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178 are specialized banks). Starting in 1994, in an

socialistic monobank system as the states in this

231

179 attempt to reduce market concentration and

region still control monobanks. The paper ar- 232

180 enhance competition, the Egyptian government

gues that various transactional structures could

233

181 embarked on an active bank privatization pro-

have significant effects on a bank’s microstruc-

234

182 gram—as one element of economic reform. The

ture, strategy, and post-privatization perfor- 235

183 privatization program consists of two separate

mance.

236

184 branches, the privatization of JVBs and the

In another study, Unal and Navarro (1999) 237

185 privatization of STBs.

thoroughly examine the technical process of 238

186 With regard to JVB privatization, in 1994 the

bank privatization in Mexico and provide a de- 239

187 government issued directives to the four state-

tailed explanation of this process. They argue 240

188 owned banks to sell their holdings in 23 JVBs,

that the lack of a previously enhanced legal 241

189 or at least reduce their holdings to less than

and regulatory framework is a major obstacle 242

190 51%. However, no major activity occurred until

in the full achievement of bank privatization 243

191 early 1996, when the government approved

objectives set by the government, so there is a 244

192 amendments to the banking and credit law, lift-

need to build a better regulatory and supervi- 245

193 ing the 49% limitation on foreign ownership of

sory environment long before the privatization 246

194 an Egyptian JVB. Following that, 14 JVBs were

process starts.

247

195 either partially or fully privatized.

Abarbanell and Bonin (1997), Bonin and 248

196 However, in 1999 the bank privatization pro-

Wachtel (1999), Hasan and Marton (2003), 249

197 cess stalled as several factors contributed to the

and Bonin, Hasan, and Wachtel (2005a) pro- 250

198 apparent lack of enthusiasm for selling of JVB

vide evidence that bank privatization is difficult 251

199 shares (among these factors were the stock mar-

to achieve in transition economies. However, 252

200 ket’s lackluster performance and the change in

the latter two papers along with another paper

253

201 the income tax code of 1998, which eliminated

by the same authors, Bonin, Hasan, and Wach-

254

202 the ability of banks to earn tax-free income

tel (2005b) indicate that banks with a greater 255

203 on government securities. This resulted in a sig-

foreign ownership involvement are associated 256

204 nificant decline in bank profitability and hence

with a higher efficiency. These facts provide 257

205 reduced the attractiveness of the banking sector

strong evidence that ownership structure really

258

206 as a whole).

matters in banking. The private banks in these

259

207 Although some JVB privatizations were suc-

studies are found to be more efficient than their

260

208 cessful, to date there have been no successful

state-owned-counterparts, and the gap in- 261

209 STB sales. In early 1997, the government

creases when private banks are controlled by 262

210 agreed with the IMF to privatize one of the

foreign ownership.

263

211 four state-owned commercial banks before the

212 end of that year. However, until mid-2005,

213 there had been no announcement regarding

214 which bank would be privatized or how it

215 would be sold.

3

In the pertinent research on Latin America, 264

we find that studies by Clarke and Cull 265

(1999a, 1999b) on bank privatization in Argen-

266

tina are very well executed. In one paper

267

(1999a), they analyze the pre- and post-privati-

268

zation performance of publicly owned Argen- 269

tinean provincial banks and show that 270

216 3. LITERATURE REVIEW ON BANK

privatized provincial banks operated quite dif-

271

217 PRIVATIZATION

ferently from public provincial banks, yet simi-

272

218 As mentioned previously, in the past few

219 years a moderate amount of theoretical and

220 empirical work on bank privatization has

221 emerged. We observe that all work on this topic

222 has addressed (i) transactional structures and

223 the technical process of bank privatizations,

224 (ii) post-privatization performance of priv-

225 atized banks, or (iii) both issues together.

lar to the 10 largest established private banks. 273

In contrast to the successful bank privatiza- 274

tion in Argentina, Markler (2000) identifies 275

some factors that have impeded Brazil’s at- 276

tempts to privatize its state-owned banks. 277

Among these factors are the collapse and acqui-

sition of private banks, foreign participation, 279

278

and globally oriented financial markets. 280

281

The empirical works on bank privatization in

226 Meyendorff and Snyder (1997) examine the

developed countries tend to be, however, lim- 282

227 transactional structures of privatization in

ited. For a group of six Italian privatized

283

228 three monobanks from Central Europe and

banks, Farabullini and Hester (2001) find posi-

284

229 Russia. They find that these governments are

tive changes in the organizational structure and

285

230 not working seriously toward breaking up the

profitability in the post-privatization period of

286

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WORLD DEVELOPMENT

287 the sample banks. Last, Verbrugge, Megginson,

288 and Owens (1999) investigate the performance

289 of bank privatization in 25 developed and

290 emerging economies and they document lim-

291 ited post-privatization improvement in bank

292 performance. Additionally, they argue that

293 substantial state ownership remains after priv-

294 atization in most privatized banks, which raises

295 serious problems for establishing market-ori-

296 ented systems.

297 Recently, a special issue of the Journal of

298 Banking and Finance (2005) on bank privatiza-

299 tion and a new book by Megginson (2005a,

300 2005b) shed light on several empirical works

301 on bank privatization. Among these papers,

302 Megginson in his survey paper (2005a) and

303 book (2005b) concludes that although privati-

304 zation generally improves the performance of

305 financial firms, the improvement is less than

306 that observed in the studies of non-financial

307 firms. Also the author finds that foreign owner-

at least 2 years of post-privatization data to 340 measure performance changes. 341

342

identify 14 privatization processes for JVBs. 343

However, we excluded two banks: one because

344

its state ownership is still above 50%, and the 345

other because we were not able to find sufficient

346

pre-privatization data. Therefore, the final sam- 347

ple consists of 12 JVBs, 11 of which are com- 348

mercial banks. Out of these privatized banks, 349

the state owns 20% or less in only four banks, 350

and only one bank is 100% privately owned. 351

We also identify the sub-samples of benchmark 352

banks that were not involved in the privatiza- 353

tion process to serve as benchmarks. These 354

six combined- 355

benchmarks are five PVBs,

ownership banks with a private majority 356

(MPVBs), 5 eight combined-ownership banks 357

and the four 358

7 359

The accounting data of the sample privatized 360

big state-owned commercial banks (STBs).

with a state majority (MSTBs),

As seen in Tables 1 and 2 , we were able to

4

6

308 ship involvement produces a positive impact on

banks and their group counterparts are drawn 361

309 bank performance. Clarke, Cull, and Shirley

from the financial information provided by 362

310 (2005) conclude that gains are greater from

the Kompass Egypt Financial Year Books ( Fiani

363

311 bank privatization when the government gives

and Partners , various issues). This rich source 364

312 up control and does not restrict competition,

of financial information displays the financial 365

313 when banks are sold to strategic investors,

statements of respective banks in Egypt in a 366

314 and when foreign banks are allowed to partici-

consistent manner so that selected performance

367

315 pate in the privatization process. Many papers

measures are on a comparable basis, following

368

316 show the same results where ownership struc-

international accounting standards (IAS). 369

317 ture matters in determining the outcomes of

318 bank performance (see e.g., Berger, Clarke,

319 Cull, Klapper, & Udell, 2005; Boubakri, Cos-

5. PERFORMANCE MEASURES AND

370

320 set, Fischer, & Guedhami, 2005; Nakane &

METHODOLOGY

371

321 Weintraub, 2005; Otchere, 2005; Williams &

322 Nguyen, 2005 ).

(a) Performance measures

372

323 From the aforementioned literature and

324 other studies not mentioned here, we find that

The methodology used in this paper incorpo-

373

325 most bank privatization studies have focused

326 chiefly on transition economies in Latin Amer-

327 ica, and some Asian countries. The aim of our

328 paper is to fill this gap by studying a country in

329 the MENA region, a part of the world that is

330 considerably understudied in the area of finan-

331 cial economics. This is what we address next.

332 4. SAMPLE CONSTRUCTION

rates many accounting performance measures 374

375

to allow for comparison of pre- and post-priv-

atization performance. It is well-documented 376

theoretically and empirically that transferring 377

ownership from the public to the private sector

378

should lead to an increase in profitability as 379

private management would show a greater con-

cern for profits compared to public manage- 381

380

ment. Also, it is expected that privatization 382

should provide a better allocation of 383

resources—whether financial, human, or tech- 384

333 This study examines the performance of a

nological—so that there is a better chance that

385

334 sample of Egyptian JVBs from 1996 to 1999,

the new management will be able to meet regu-

386

335 during which time control was transferred from

lated standards, improve asset quality, and im-

387

336 the state to the private sector. We define bank

prove operating efficiency. The measures we use

388

337 privatization by a transfer of ownership that re-

to check for the above-mentioned propositions

389

338 duces the state’s share to less than 50%. The

are mostly those from Cornett, Ors, and Tehr-

390

339 sample period ends in 1999 because we needed

anian (2002), in addition to some from Verb- 391

PRIVATIZATION, STATE OWNERSHIP, ANDBANK PERFORMANCE IN EGYPT

5

Please cite this article in press as: Omran, M. , Privatization, State Ownership, and opment (2007), doi:10.1016/j.worlddev.2006.07.002

World Devel-

,

Table 1. Details of JVB privatization offers (1996–99)

Banks

Date of privatization

Offer size

No. of shares listed (000’s) Market capitalization Total assets ($ 000’s)

 

As, % No. of shares (000’s)

 

($ 000’s)

Alexandria Comm. & Mar. Bank

1997

27

300

1,125

64,714

1,093,587

Bank du Caire et de Paris

 

1997

27

7

26

68,451

1,173,412

Cairo Barclays Bank

 

1999

11

55

500

206,490

2,890,335

Commercial International Bank

1998

25

16,250

65,000

733,791

13,277,290

Credit Internationale d’Egypte

1996

11.5

577

5,109

76,109

920,558

Egyptian American Bank

a

1997

20

2,400

12,000

460,177

5,307,541

Egyptian Commercial Bank

 

1999

10

963

9,626

114,092

1,945,184

Export Development Bank

a

1996

24

600

2,500

300,147

2,500,475

Misr Exterior Bank

 

1997

39

2,847

7,300

324,012

5,422,964

Misr International Bank

1997

20

4,500

22,500

667,965

8,979,760

Misr Romania Bank

1998

18

900

5,000

n.a.

1,563,443

National Bank for Development

1998

26

5,200

20,000

48,600

6,205,061

Nationale Societe Generale

 

1997

10.5

1,050

10,000

133,038

3,079,483

Suez Canal Bank

*

1997

34

3,400

10,000

235,841

7,370,071

The table shows the privatization transactions of the privatized JVBs from 1996 to 1999. For each bank, we provide the date of privatization, the offer s ize, the number of

shares listed, the market capitalization, and the market value of the total assets, where applicable.

a The reduction in state ownership was achieved via increases in capitalization by the private sector.

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Table 2. Ownership structure of privatized banks

Bank

Ownership

Year *

T 1, % T , % T + 1, % T + 2, % T + 3, % T + 4, %

Alexandria Comm. & Mar. Bank State

95

62

59

53

48

48

Private

5

38

42

47

52

52

Bank du Caire et de Paris

State

51

22

22

22

22

Foreign

49

76

76

76

76

Private

0

2

222–

Cairo Barclays Bank

State

51

40

40

40

Foreign

49

60

60

60

Commercial International Bank State

80

45

45

25

25

 

Foreign

5

30

30

45

45

Private

15

25

25

30

30

Credit Internationale d’Egypte

State

51

40

19.5

19.5

0

0

Foreign

39.5

51

69.5

69.5

88

88

Private

9.5

10

11

11

11

11

Egyptian American Bank

State

51

35

35

35

32

32

Foreign

41

41

41

41

41

41

Private

8

24

24

24

27

27

Egyptian Commercial Bank

State

35

25

13

13

Foreign

40

40

40

40

Private

25

35

57

57

Export Development Bank

State

100

76

76

76

76

76

Private

0

24

24

24

24

24

Misr Exterior Bank

State

59

20

20

20

20

20

Private

41

80

80

80

80

80

Misr International Bank

State

63

43

43

36

24

24

Foreign

37

37

37

37

51

51

Private

0

20

20

27

25

25

Misr Romania Bank

State

51

33

33

33

33

Foreign

49

49

49

49

49

Private

0

18

18

18

18

National Bank for Development State

62

34

34

23

23

 

Private

38

66

66

77

77

Nationale Societe Generale

State

51

36

25

25

19

19

Foreign

49

51

53

53

55

55

Private

0

13

22

22

26

26

Suez Canal Bank

State

64

48

48

11

11

Foreign

36

40

40

36

36

Private

0

12

12

53

53

The table provides detailed information regarding the ownership structure of privatized banks. For each bank, we

provide the ownership prior to the privatization date, on the privatization date, and in the post-privatization period,

year by year, up to 4 years. We divided the ownership into three main categories, state-, foreign-, and private-

ownership. *

T refers to the year of privatization, T 1 refers to the year preceding privatization, and T + 1, T + 2, and T + 3

refer to 1, 2, and 3 years following privatization, respectively.

392 rugge et al . (1999). More precisely, to identify

(ROE), which refer to income after taxes as

400

393 our sample banks’ performance changes fol-

a percentage of book value of total assets 401

394 lowing their privatization dates, we evaluate

and total equity, respectively. 402

395 the following six common performance indica-

(ii) Asset quality—indicates the bank’s loan

403

396 tors:

quality and risk, and is determined by loan

404

397 (i) Profitability—indicates overall perfor-

losses to loan that refers to charge-offs and

405

398 mance, and is measured by two proxies:

allowances for loan losses as a percentage 406

399 return on assets (ROA) and return on equity

of total loans and leases. 407

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PRIVATIZATION, STATE OWNERSHIP, ANDBANK PERFORMANCE IN EGYPT

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408

(iii) Capital risk—reflects the ability of a

(1996) indicate, matching sample firms to con-

463

409

bank to extend loans while meeting regulated

trol firms based on industry, size, and past per-

464

410

capital standards and is measured by two

formance will lead to well-specified test 465

411

proxies: core capital to assets and loans to

statistics. We decided to test the adjusted per- 466

412

total capital ( x), which refer to total share-

formance methodology based on several speci-

467

413

holders’ equity as a percentage of book value

fications to overcome the problem of the 468

414

of total assets and total loans as a percentage

varying sizes of each group and, to some extent,

469

415

of book value of total equity, respectively.

the industry differences.

9

As we did for priv- 470

416

417

418

419

420

421

422

423

424

425

426

427

428

429

430

431

432

433

434

435

436437

438

439

440

441

442

443

444

445

446

447

448

449

450

451

452

453

454

455

456

457

458

459

460

461

462

(iv) Operating efficiency—reflects the bank’s

ability to generate revenue and pay expenses

and is measured by three proxies: net inter-

est margin, non-interest revenue production,

and return on loans, which refers to interest

expenses minus interest revenues as a per-

centage of total assets, non-interest income

as a percentage of total assets, and interest

and fees on loans to total loans and leases,

respectively.

(v) Liquidity risk—indicates the cash posi-

tion of the bank and is measured by invest-

ment securities to total assets, which refers

to the book value of total investment securi-

ties as a percentage of book value of total

assets.

(vi) Growth—reflects the bank’s change in

assets and is measured by the asset growth

rate, which is the change in the book value of total assets as a percentage of book value of total assets in the previous year.

(b) Methodology

We carry out the empirical tests as follows: (i)

To examine how privatized banks perform in

the post-privatization period versus pre-privati-

zation (on an unadjusted basis), we calculate

the mean prior to and after the date of privati-

zation for each privatized bank, excluding the

year of privatization (year 0). 8 Therefore, the

minimum time interval data for each bank is

5 years (from at least year 2 to year +2). Hav-

ing done that, we test the null hypothesis that

atized banks, we also compute the mean values 471

of each bank in the four group counterparts, 472

identified previously, prior to and after the 473

privatization date of each JVB. 10 To overcome 474

the problem of the differences in pre-privatiza- 475

tion performance between privatized banks 476

and their group counterparts, we adjusted the 477

data to ensure that such comparisons are valid 478

by calculating the relative performance changes 479

(which refers to the proportional performance 480

changes of a privatized bank minus the propor- 481

tional performance changes of each group of 482

benchmark banks) as follows:

483

11

RPC i ¼ ð P i; t P i; t 1 Þ= P i; t 1

ðP

benchmark ;t P benchmark ; t 1 Þ

ð1 Þ 485485

486

487

488

489

zation period, P benchmark, t is the mean perfor- 490

mance of the benchmark group of banks in 491

the post-privatization period, and P

492

is the mean performance of the benchmark 493

group of banks in the pre-privatization period. 494

Having computed the RPC for each perfor- 495

mance measure and each bank, we again em- 496

ploy the parametric and the non-parametric 497

test statistics just mentioned. In other words, 498

we compare the proportional performance 499

changes of privatized firms against the propor- 500

tional performance changes of each group of 501

=P benchmark ;t 1

where RPC i is the relative performance change

for bank i, P i , t is the mean performance for bank

i in the post-privatization period, P

i , t 1 is the

mean performance for bank i in the pre-privati-

benchmark, t 1

the cross-sectional average performance

benchmark banks.

502

changes are equal to zero for a sample of n priv-

(iii) To examine whether there are any signif-

503

atized JVBs. Since the sample size is small (only

12 banks) and some performance measures are

not normally distributed, we also employ the

non-parametric Wilcoxon signed-rank test to

test the null hypothesis that the median perfor-

mance changes are equal to zero.

icant differences in performance, not perfor- 504

mance changes, among banks according to 505

their ownership structure, we compare the 506

post-privatization performance of privatized 507

banks,not performance changes, versus each 508

group of benchmark banks. We then comple- 509

(ii) To examine performance changes of priv-

ment the findings of this comparison by 510

atized bank irrespective of any industrywide

employing several fixed-effects regressions over

511

factors that might be affecting performance,

the entire study period for all banks to capture

512

we matched our sample privatized banks to dif-

the impact of ownership structure on bank 513

ferent control groups of banks (PVBs, MPVBs,

performance. This, in fact, could shed light on

514

MSTBs, and STBs). As Barber and Lyon

which ownership structure performs better 515

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WORLD DEVELOPMENT

516 regardless of the performance changes between

517 the pre- and post-privatization period.

518 6. RESULTS

519 In this section, we attempt to examine whether

520 privatized banks are more profitable and effi-

521 cient in the post-privatization period. We deal

522 with this issue at three different levels: (i) unad-

523 justed results, (ii) matched adjusted results, and

524 (iii) post-privatization comparison between

525 privatized banks and the different group coun-

526 terparts. We then complement that by examin-

527 ing the impact of ownership structure on bank

528 performance over the entire study period.

529 (a) Pre- versus post-privatization performance of

530 privatized banks (unadjusted basis)

531 Table 3 presents the comparison between pre-

532 and post-privatization performance of priv-

533 atized banks based on both the parametric

534 t -test and the non-parametric Wilcoxon

535 signed-rank test.

536 The results reveal that both profitability ra-

537 tios decrease after divestiture of privatized

538 banks. While the decrease in ROA is not signif-

539 icant, the statistical tests pass the critical values

540 of significance for ROE. Surprisingly, such de-

541 cline in profitability ratios is not accompanied

542 with a similar decline in the loan losses to loan

543 ratio, that is, improvement in asset quality. In

544 contrast, the loan losses to loan ratio increases

545 slightly after privatization, but not at any level

(b) Pre- versus post-privatization performance of 567 privatized banks (unadjusted basis) 568

The question now is: Are the changes in 569 performance measures of privatized banks due 570 to new ownership structures? Or are they 571

attributable to external factors other than priv- 572

atization? To account for the impact of contem- 573

poraneous events, we also report matched 574

adjusted performance measures in Tables 4 575

576

As we can see from Table 4, compared with 577

and 5 .

private-owned and majority PVBs, it is remark- 578

able that the relative performance changes of 579

ROA and ROE for privatized banks are sub- 580

stantially lower than those of PVBs and 581

MPVBs at the 1% and the 10% level of signifi- 582

cance for the first ratio, and at the 1% level for 583

the latter. We also notice that none of our sam- 584

ple-privatized banks outperforms its bank 585

counterpart in terms of ROE, while only 33% 586

of privatized banks exceed the MPVBs in terms 587

of ROA. With these results in mind, we do not 588

589

see any improvement in the asset quality indica-

tor as the slight better relative performance 590

591

changes of privatized banks compared to PVBs

and MPVBs are not significant. 592

As for capital risk indicators, it seems that 593

privatized banks improve their core capital to 594

assets ratio relative to their matched banks, 595

although not significant relative to PVBs but 596

significant at the 10% level relative to 597

MPVBs.

However, the relative change in 598

loans to total capital of privatized banks is 599

not significantly different from their counter- 600

12

546 of significance.

parts at any level.

601

547 As for capital risk indicators, we find an

As for operating efficiency, we conclude that—

602

548 insignificant increase in the core capital to as-

apart from net interest margin (NIM)—the rela-

603

549 sets ratio and an insignificant decline in the

tive performance changes of non-interest reve-

604

550 loans to total capital ratio, which refers to a

nues and return on loans of privatized banks 605

551 steady position in capital risk indicators for

decline compared with their bank counterparts,

606

552 privatized banks. We also document similar

although significantly only for the first ratio 607

553 findings for all operating efficiency ratios as

compared to PVBs. While the relative perfor- 608

554 they do not show any significant change follow-

mance change in the liquidity indicator improves

609

555 ing privatization. The liquidity indicator, mea-

for privatized banks compared with both PVBs

610

556 sured by investment securities to total assets,

and MPVBs at the 10% level. Lastly, we find 611

557 declines significantly at the 5% level whereas

no significant difference in relative performance

612

558 the decline in the asset growth ratio is insignif-

change in the asset growth rate between our sam-

613

559 icant.

ple privatized banks and their counterparts. 614

560 Although it appears that the performance of

We could, however, draw some conclusions 615

561 privatized banks deteriorated following privati-

from the above analysis—most importantly, 616

562 zation, we cannot draw conclusions from these

the relative performance changes of privatized

617

563 results at this point because the data used in the

banks lag behind their bank counterparts (PVBs

618

564 analysis are not adjusted for industrywide

and MPVBs), particularly in terms of profitabil-

619

565 factors that may be affecting the performance

ity and some efficiency ratios. Nevertheless, since

620

566 measures of these banks.

we compare the relative performance changes of

621

PRIVATIZATION, STATE OWNERSHIP, ANDBANK PERFORMANCE IN EGYPT

9

Please cite this article in press as: Omran, M. , Privatization, State Ownership, and opment (2007), doi:10.1016/j.worlddev.2006.07.002

World Devel-

,

Table 3. Comparison of pre- and post-privatization performance of privatized banks

Proxies

No. of banks increased Pre-privatization Post-privatization Change in mean

 

(decreased)

mean (median)

mean (median)

(median)

t -Statistic for difference in means

z -Statistic for difference in medians

Profitability indicators Return on assets

4

0.017

0.014

0.004

1.782

 

1.451

(8)

(0.018)

(0.013)

(

0.004)

Returns on equity

2

0.229

0.164

0.065

3.329 ***

 

2.471 **

(10)

(0.232)

(0.158)

( 0.070)

 

Asset quality indicators

Loan losses to loans

7

0.02

0.022

0.001

0.420

0.431

(5)

(0.017)

(0.019)

(0.002)

 

Capital risk indicators

Core capital to assets

7

0.078

0.082

0.004

0.679

0.745

(5)

(0.071)

(0.081)

(0.008)

 

Loans to total capital ( x)

4

7.35

7.242

0.106

0.162

 

0.510

(8)

(7.13)

(6.907)

( 0.627)

 

Operating efficiency indicators

Net interest margin

9

0.016

0.020

0.003

1.400

1.451

(3)

(0.02)

(0.022)

(0.004)

 

Non-interest revenue production

4

0.024

0.022

0.003

1.772

 

1.138

(8)

(0.023)

(0.022)

( 0.002)

 

Return on loans

8

0.127

0.133

0.006

0.694

0.745

(4)

(0.119)

(0.131)

(0.012)

 

Liquidity risk indicators

Investment securities to total assets

3

0.139

0.084

0.048

2.615

**

2.079 **

(9)

(0.14)

(0.074)

( 0.045)

 

Growth indicators

Asset growth rate

4

0.115

0.088

0.027

1.230

 

1.059

(8)

(0.105)

(0.10)

( 0.032)

 

The table shows the results of the parametric t -test and the non-parametric Wilcoxon signed-rank test for the significant changes in the mean and median values of the

selected performance measures of privatized banks in the pre- and post-privatization periods. We provide the mean (median) values of each variable for the pre- and

post-privatization period, the mean (median) change for each variable after versus before privatization, and t - and z-statistic with their significant level. The number of

useable banks is provided along with the number of banks that experienced an increase or decrease after privatization. For the parametric (non-param etric) test, we list

the results under the null hypothesis that the mean (median) performance change = 0.0 versus the alternative hypothesis that the mean (median) performance

change 5 0.

*** and ** refer to the 1% and 5% significance levels, respectively.

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Please cite this article in press as: Omran, M. , Privatization, State Ownership, and opment (2007), doi:10.1016/j.worlddev.2006.07.002

World Devel-

,

Table 4. Relative performance change comparison between privatized banks and PVBs and MPVBs

Proxies

PVBs benchmark

 

Majority PVBs benchmark

 
 

No. of banks Privatized

Private

Differences t -Statistic for z -Statistic for No. of banks Privatized

Private

z

-Statistic

 

increased

mean

mean

mean

difference

difference

increased

mean

mean

Differences t -Statistic for difference in

mean

for difference

(decreased)

(median)

(median)

(median)

in means

in medians

(decreased)

(median)

(median)

(median)

means

in medians

Profitability indicators

 

Return on assets

0

0.153

0.540

0.693

5.382

***

3.020

***

4

0.153

0.117

 

0.270

2.031 *

 

1.765

*

(12)

( 0.171)

(0.561)

( 0.666)

(8)

(

0.171)

(0.088)

(

0.277)

Returns on equity

0

0.283

0.419

0.702

7.865

***

3.020

***

0

0.283

0.360

0.642

6.559 ***

3.020 ***

(12)

( 0.309)

(0.431)

( 0.725)

(12)

( 0.309)

(0.305)

( 0.618)

 

Asset quality indicators

 

Loan losses to loans

6

0.640

0.128

0.512

1.023

0.000

6

0.640

0.097

 

0.544

1.089

0.000

(6)

(0.109)

(0.108)

(0.018)

(6)

(0.109)

(0.086)

(0.023)

Capital risk indicators

 

Core capital to assets

7

0.120

0.084

0.037

0.440

0.431

8

0.120

0.040

0.161

1.957 *

1.687 *

(5)

( 0.130)

(0.097)

(0.062)

(4)

( 0.130) ( 0.042)

 

(0.156)

Loans to total

5

0.069

0.026

0.095

0.844

0.000

4

0.069

0.156

0.087

0.790

 

0.981

capital ( x )

(7)

( 0.081) ( 0.026)

( 0.023)

(8)

( 0.081)

(0.158)

(

0.220)

Operating efficiency indicators

 

Net interest margin

9

0.216

0.042

0.174

1.419

1.373

8

0.216

0.165

 

0.05

0.413

0.745

(3)

0.265

(0.056)

(0.203)

(4)

0.265

(0.158)

(0.067)

Non-interest revenue

2

0.067

0.246

0.313

4.306

***

2.807

***

4

0.067

0.028

0.039

0.651

0.432

production

(10)

( 0.060)

(0.198)

( 0.266)

(8)

( 0.060) ( 0.035)

(

0.071)

Return on loans

4

0.076

0.160

0.084

1.395

1.215

4

0.076

0.154

0.077

1.283

 

1.137

(8)

(0.108)

(0.161)

( 0.053)

(8)

(0.108)

(0.154)

( 0.047)

 

Liquidity risk indicators

 

Investment securities

7

0.294

0.526

0.233

1.964

*

1.726

*

8

0.294

0.521

 

0.227

2.007 *

1.765 *

to total assets

(5)

( 0.359) ( 0.583)

(0.234)

(4)

( 0.359) ( 0.524)

(0.189)

Growth indicators

Asset growth rate

5

0.121

0.244

0.123

0.392

0.118

10

0.121

0.550

 

0.429

1.560

1.608

(7)

( 0.345) ( 0.235)

( 0.081)

(2)

( 0.345) ( 0.541)

(0.205)

The table shows the results of the parametric t -test and the non-parametric Wilcoxon signed-rank test for the significant differences between privatized banks and both

PVBs and MPVBs based on the mean and median values of selected performance measures. We compare the relative performance change for each group of banks and

test for the significant differences between them. We provide the mean (median) values of each variable based on the relative performance change method , the mean

(median) differences between privatized and both PVBs and MPVBs, and t - and z-statistic with their significant level. The number of useable banks is provided along with

the number of banks that experienced an increase or decrease compared with their bank counterparts. For the parametric (non-parametric) test, we lis t the results under

the null hypothesis that the mean (median) proportional performance change of each of the two samples = 0.0 versus the alternative hypothesis that the mean (median)

proportional performance change of each of the two samples 5 0.

*** and * refer to the 1%, and 10% significance levels, respectively.

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ARTICLE IN PRESS

No. of Pages 20

PRIVATIZATION, STATE OWNERSHIP, ANDBANK PERFORMANCE IN EGYPT

11

Please cite this article in press as: Omran, M. , Privatization, State Ownership, and opment (2007), doi:10.1016/j.worlddev.2006.07.002

World Devel-

,

Table 5. Relative performance change comparison between privatized banks and majority state- and state-owned banks

Proxies

Majority state-owned banks benchmark

 

State-owned banks benchmark

 
 

No. of banks Privatized Maj. state Differences t -Statistic for z -Statistic for No. of banks Privatized

State