Documentof
The WorldBank
FOROFFICIALUSEONLY
ReportNo: 36379-EG
PROJECTAPPRAISAL DOCUMENT
ONA
PROPOSEDLOAN
INTHE AMOUNT OF214.2 MILLIONEGYPTIANPOUNDS
(US$37.1MILLIONEQUIVALENT)
TO THE
ARAB REPUBLICOFEGYPT
FORA
MORTGAGE FINANCEPROJECT
June 5,2006
Finance, Private Sector andInfrastructure Department
MiddleEastandNorthAfricaRegion
This document has a restricted distribution and may be used by recipients only in the
performance o f their official duties. Its contents may not otherwise be disclosed without World
Bankauthorization.
CURRENCYEQUIVALENTS
(Exchange Rate effective May 11,2006)
Currency Unit = Egyptianpound (LE)
LE5.766 = US$ 1.00
US$0.173 = LE 1.00
FISCALYEAR
January 1 - December31
ABBREVIATIONSAND ACRONYMS
ARM Adjustable Rate Mortgage
BOP Balance o fPayments
CAS Country Assistance Strategy
CBE CentralBank o f Egypt
C M A Capital Markets Authority
ECIM EgyptianCadastral Information System
ECMR EgyptianCompany for Mortgage Refinancing
EFS EgyptFinancial Services
ESA Egypt Survey Authority
EU EuropeanUnion
FIL Financial Intermediary Loan
FMR Financial ManagementReport
FMS Financial Management System
FRM FixedRate Mortgage
FSAP Financial Sector Assessment Report
FSDPL Financial Sector Development Policy Loan
GOE Government o f Egypt
GSF Guarantee and Subsidy Fund
LTV Loan-to-Value Ratio
MOF MinistryofFinance
MOI MinistryofInvestment
MOIC Ministryo fInternational Cooperation
MOJ MinistryofJustice
MFA Mortgage Finance Authority
MOU Memorandum o fUnderstanding
MSAD MinistryofStatefor Administrative Development
P M L Participating Mortgage Lender
RELC Real Estate Lending Company
REPD Real Estate Publicity Directorate (Ministryo fJustice)
RETD Real Estate TaxationDepartment (Ministry o fFinance)
ROE Return on Equity
USAID United States Agency for InternationalDevelopment
~~ ~Vice President: Christiaan J. Poortman
Country Director: EmmanuelMbi
Sector Director HosseinRazavi
Sector Manager: Zoubida Allaoua
Task TeamLeader: Deane N.Jordan
Task Manager: Sahar Nasr
This document has arestricteddistribution andmay be usedby recipients only inthe performance of their
official duties. Its contents may not otherwise be disclosed without World Bank authorization.
FOROFFICIAL USEONLY
ARAB REPUBLICOFEGYPT
MORTGAGEFINANCEPROJECT
CONTENTS
Page
A. STRATEGIC CONTEXTAND RATIONALE .............................................................................................. 1
1. Country and sector issues .......................................................................................................... 1
2. Rationale for Bank involvement .................................................................................................. 4
3. Higher level objectives to which the project contributes ................................................................... 4
B. PROJECTDESCRIPTION .............................................................................................................................. 4
1. Lending instrument .................................................................................................................. 4
2. Project development objective and key indicators ........................................................................... 5
3. Project components .................................................................................................................. 6
4. Lessons learned and reflected in the project design ......................................................................... 7
5. Alternatives considered and reasonsfor rejection ........................................................................... 8
C. IMPLEMENTATION ....................................................................................................................................... 9
1. Partnership arrangements (if applicable) ....................................................................................... 9
2. Institutional and implementation arrangements .............................................................................. 9
3. Monitoring and evaluation of outcomeshesults ............................................................................ 10
4. Sustainability ........................................................................................................................ 11
5. Critical risks and possible controversial aspects ........................................................................... 11
6. Loan conditions and covenants ................................................................................................. 12
D. APPRAISAL SUMMARY .............................................................................................................................. 13
1. Economic and financial analyses ............................................................................................... 13
2. Technical ............................................................................................................................. 14
3. Fiduciary .............................................................................................................................. 14
4. Social .................................................................................................................................. 15
5. Environment ......................................................................................................................... 15
6. Safeguard policies .................................................................................................................. 16
7. Policy Exceptions and Readiness .............................................................................................. 16
ANNEXES
Annex 1:Country and Sector or ProgramBackground .............................................................................................. 17
Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ........................................................ 22
Annex 3: Results Framework and Monitoring............................................................................................................ 24
Annex 4: DetailedProject Description ....................................................................................................................... 26
Annex 8: Project Costs ................................................................................................................................. 42
Annex 6: Implementation Arrangements .................................................................................................................... 43
Annex 7: FinancialManagementandDisbursement Arrangements ........................................................................... 44
Annex 8: Procurement Arrangements ......................................................................................................................... 52
Annex 9: Economic andFinancial Analysis 53
Annex 10: Safeguard Policy Issues .............................................................................................................................
................................................................................................................
61
Annex 11: Project Preparationand Supervision .......................................................................................................... 62
Annex 12: Documents inthe ProjectFile .................................................................................................................... 64
Annex 13:Statement o fLoans andCredits ................................................................................................................ .65
Annex 14: Country at a Glance 67
Annex 15: Map ............................................................................................................................................................
...................................................................................................................................
69
This operation was preparedjointly with the Government o f Egypt and benefited from the close collaboration and
overall guidance o f H.E. Dr. Mahmoud Mohieldin, Minister o f Investment. The team included Mr. Osama Saleh,
Mr.Ashraf A1Kady andMs.May Abdel Hamid, Mortgage Finance Authority andProject Task Force; Mr.Ahmed
Rostom, Economist, Ministryo f Investment; Ms. Amina Ghanem, Advisor to the Minister o f Finance, Ministryof
Finance; Ms. Lobna Helal, Asistant Sub-Governor, BankingR e f o mUnit, Central Bank o f Egypt; Mr.Tarek Hasan
Ali Amer, DeputyGovernor, Central Bank o f Egypt; Mr.Bahaa Ali Eldin, Sr. Legal Advisor; andMr.Ziad Bahaa,
Chairman, General Authority for Investment and Free Zones (GAFI). Ms. Souraya Ab0 El Saoud, Undersecretary
o f State for International and Regional Financing Organizations, Ministry o f International Cooperation led the
Egyptiandelegation at the negotiations.
The IBRD team was composed o f Deane Jordan, Lead Operations Officer; Sahar Nasr, Sr.Financia1 Economist;
L o k Chiquier, Lead Financial Officer; Mohamed Yehia Abd El Karim, Financial Management Specialist;
Abdulgabbar Hasan Al-Qattab, Procurement Specialist; Ghada Youness, Sr. Counsel; Stephen Butler, Property
Rights Registration Consultant; Michael Lea, Mortgage Finance Consultant; Sydnella Kpundeh, ProgramAssistant;
Steve WanYan Lun,Sr. ProgramAssistant; and Amira Zaky, ProgramAssistant.
This document has arestricteddistribution andmaybe usedbyrecipientsonly inthe performance oftheir
official duties. Its contents may not otherwisebe disclosed without World Bankauthorization
ARAB REPUBLICOF EGYPT
MORTGAGEFINANCE PROJECT
PROJECT APPRAISAL DOCUMENT
Private and Financial Sector DevelopmentDepartment
MiddleEastand North Africa Region
Date: June 2,2006 Team Leader: Deane Jordan
Country Director: Emmanuel Mbi Sectors: Housing finance and real estate
Sector Manager: Zoubida Allaoua markets(60%);Capital markets (30%);Central
Project ID: PO93470 government administration (10%)
Lendinginstrument: Financia1 Themes: Other financial andprivate sector
Intermediary Loan development (P)
Environmental screening category: Not
- required
P
Safeguard screening category: N o impact
Project FinancingData:
[Xlloan [ 3 Credit [3 Grant [ 3 Guarantee [ 3 Other:
For Loans/Credits/Others:
Total Bank financing: Egyptian pounds 214.2 million (US$37.1 million equivalent)
Proposedterms: National Currency Paid-inCapital FixedSpread Loan (NCPIC-FSL)
Source Local I Foreign I Total
IBRD
ECMR bond investors
ECMR equity
Borrower: Government of Egypt
Responsible agency: Ministryof Investment, Egyptian Company for Mortgage Refinancing
K C M R ) -
P
Estimated disbursements (Bank FY/US$m)
Project implementationperiod: August 1,2006 to January 31,201 1
Expectedeffectiveness date: October 16,2006
Expectedclosingdate: July 31,2011
Does the project depart from the CAS incontent or other significant I o Yes 0 N o
respects?
Does the project require any exceptions from Bank policies? oYes @ N o
Have these been approved by Bank management? o Yes 0 N o
I sapproval for any policy exception sought from the Board? oYes 0No
Does the project include any critical risks rated "substantial" or *Yes o N o
"high" ?
TheEgyptian Company for MortgageRefinancing (ECMR), legally incorporatedas ajoint
stock company during project preparation with the assistance of the World Bank, will
receive the proceeds of a World Bank local currency loan as a line of credit. The line of
credit will support the initial, start-up phase of the ECMR's operations as a second-tier,
wholesale, market-based liquidity facility focused on refinancing longer-term residential
mortgage loans originated by lenders in the primary market. As it matures, the ECMR i s
expected to begin issuingbonds or other securities in the capital market to help fund its
operations on a market sustainable basis.
Which safeguard policies are triggered, if any? Not Applicable
Significant, non-standard conditions, ifany, for:
Rej PAD C.6
Boardpresentation: Legal incorporation of the ECMR with the shareholders' initial equity
capita1paid-in.
Loan effectiveness conditions: Signature o f a Subsidiary Agreement, satisfactory to the
Bank.
Covenants applicable to project implementation: The Loan and Project Agreements include
covenants relating to: (i)institutional and other implementation arrangements; (ii)the
modalities and prudential treatment of the ECMR; (iii) terms and conditions of subsidiary
on-lending arrangements between the Borrower and the ECMR; (iv) terms and conditions of
participation agreements between the ECMR and PMLs; (v) terms and conditions of
mortgage loans; (vi) property rightsregistration; and (iv) establishment of a financial
management system.
A. STRATEGIC CONTEXT AND RATIONALE
1. Country andsectorissues
Recent Macroeconomic Developments
1. The macroeconomic framework is satisfactory for the purposes of the proposedproject.
Real GDP grew b y 5 percent in fiscal 2004/05 (i.e. July 2004 to June 2005) and, with the reforms
underway, this is projected to be 6 percent through 2006/07 despite some concerns, particularly
over a large budget deficit of nearly 10percent of GDP. Economic management has improved in
recent years. The Egyptian authorities are ensuring that the management o f the exchange rate,
monetary and fiscal policies i s consistently coordinated, and appropriate tools are being
developed; towards this end, the CBE had to ensure a smooth functioning o f the exchange rate
market and develop a more comprehensive monetary policy framework. The authorities
announced that they would target inflation over the mediumterm and the exchange rate regime i s
now a managed float although the pound's nominal exchange rate with the dollar i s kept within a
narrow band after a recent nominal appreciation (to around 5.75 per U S dollar). Inflation has
slowed considerably; the Consumer Price Index (CPI) has declined from its October 2004 peak
of 18.2 percent to 3.7 percent inMarch2006.
Financial Sector
2. The financial sector faces important challenges that were identified b y a Financial Sector
Assessment Program (FSAP) in 2002. The Government of Egypt (GOE) is pursuing a major
agenda for macroeconomic and structural reform and modernization o f the financial sector,
including restructuring and privatizing public sector banks, reforming the insurance sector,
developing a new system of mortgage finance for a more sustainable housing finance market,
and strengthening regulatory capacity and financial supervision apparatus. These actions augur
well for the proposed project. The main challenges for the GOE include low levels of
competition and financial intermediation in the primary market (with large liquidity in the
banking system), low levels of credit to the private sector, relatively high intermediation costs,
limitedinnovation, and dominance o f state ownership. The banking system i s burdenedby a high
level of non-performing loans, while the non-bank segment i s characterized by underdeveloped
bond, insurance, and mortgage markets, thin trading inequities, weak corporate governance, and
weak infrastructure for effective payment systems. The Bank however i s preparing a proposed
Financial Sector Development Policy Loan (FSDPL) scheduled for FY2006 which will help to
lay a firm foundation in the banking sector for the proposed Mortgage Finance Project. The
GOE is also receiving support from several other donors for financial sector reform, including
the United States Agency for InternationalDevelopment (USAID) and the European Union (EU)
(refer to Annex 1for a more detailed discussion of the financial sector).
Housing Market
3. Egypt experienced very rapid urbanization until the mid-l980s, fueled by both rural to
urban migration andnatural population growth. Today the country is very urbanized. The major
cities and towns account for about 43 percent of the total population of approximately 70 million.
Smaller urban villages o f between 10,000 and 50,000 inhabitants account for an additional 24
percent o f the population.
1
4. In recent decades, the GOE has constructed about 19 new towns and satellite cities,
comprising more than 230,000 housing units. These new urban communities are intended to
provide housing alternatives in the desert to contain the demand for buildingon agricultural land
inthe Delta and Nile Valley. This activity has imposed a heavy burden on the State budget, but
many of the new urban communities still remain sparsely populated.
5. The overall population i s growing at about 1.5 percent annually, and i s projected to reach
about 88 million by 2021, representingan increase of about 18 million people over the next 15
years. The GOE has estimated that approximately 5.3 million housing units will need to be
constructed between 2005 and 2017, o f which an estimated 3.7 million units would be needed for
low income households. Much o f this population growth will be in the main urban centers,
further fuelling pressure on the housing sector, even if the share o f the urban population in the
total population does not increase significantly. Accommodating the projected urban population
growth in such a short period presents major challenges for the GOE's housing and urban
policies, infrastructure and institutions.
HousingFinance System
6. Access to affordable housing and home ownership for most Egyptian households i s
greatly constrained by an undevelopedhousing finance system. The banking sector has offered
very little formal housing finance to households although a few commercial banks - both public
and private - have made a limited amount of loans to homebuyers, mostly as part of their retail
activities or of their lending to developers, by using collateral other than mortgage pledges. A
few developers have also been providing term financing under a system of deferred installment
sale contracts, but these have not offered secure or favorable conditions for borrowers, and
housing affordability i s not improved because loan maturities are too short (Refer to Annex 1for
a more detailed discussion of the housing finance system).
7. Although the banks have plenty of liquidity they have been reluctant to extend mortgage
loans for two main reasons: the lack of registered titles (in part due to the costly and time
consuming process to obtain good title) and the maturity mismatch between their short term
deposits and long term mortgage loans. Two non-bank real estate lending companies (RELCs)
have been created but have done only a small amount of lending due to a lack of long term funds
and to difficulties and delays in registering property titles inthe new urban communities.
8. To address these constraints, the GOE i s developing an enabling environment for a
modem residential mortgage market that will enable most o f the burden o f housing finance to be
shifted away from the government budget and onto the financial markets and the private sector.
The enabling environment will include the policies, institutions and systems necessary to
facilitate the emergence of an efficient, low risk residential mortgage finance system in which
mortgage lenders compete on a market basis to make housing finance available to Egyptian
households on economically attractive terms and conditions. This is expected to lead to the
emergence of: (i) a private sector-led and funded mortgage finance system founded on a level
playing field and market competition among primary lenders; (ii)longer-term market-based
funding from institutional and private investors; and (iii) measures enabling primary lenders to
alleviate andbetter manage the associated financial risks, particularly credit risk.
2
9. Since 2001, the GOE has: (i)enacted a new Real Estate Finance Law 148/2001 (viz.,
Mortgage Law) that sets out the legal foundations for market-based housing finance, building
upon best practices from around the world, including improved collateral enforcement and
foreclosure processes; (ii)strengthened the legal and institutional framework for mortgage
securities through amendments to the Capital Markets Law; (iii) established a new regulatory
institution for real estate activities, the Mortgage Finance Authority (MFA); (iv) established a
new Ministry of Investment (MOI) with a mandate to develop the mortgage market; and (v)
encouraged the formation of new, non-bank real estate lending or mortgage companies. It has
also established a Guarantee and Subsidy Fund (GSF) to provide a temporary social safety for
borrowers who experience adverse life events such as a loss of employment that lead to payment
defaults.
10. More recently, an M O I Task Force, with the assistance of the Bank, has spearheaded the
preparation and incorporation of a new liquidity facility for mortgage finance (viz., Egyptian
Company for Mortgage Refinancing) that, when fully operational, will enable qualified mortgage
lenders to access term refinancing for their mortgage loans and to better manage the risks of
mortgage lending.
11. However, despite the considerable progress made recently, the market structure and
infrastructure for a comprehensive, well-functioning mortgage finance system i s not complete.
Key requirements are to: (i)develop the Egyptian Company for Mortgage Refinancing (ECMR)
into a well-functioning, financially sustainable, market-based institution; (ii)further strengthen
the regulatory and institutional framework for the mortgage market; and (iii) alleviate existing,
serious constraints hindering reliable, easy and quick registration and transfer of property titles
and mortgage liens by homeowners and mortgage lenders, particularly in the new urban
communities. The proposed project, in conjunction with other government and donor programs,
will seek to address these requirements.
Social HousingFinance
12. To help improve access to home ownership by lower income households, the GOE has in
the past provided a range of subsidies. Social housing programs have focused mainly on
delivering finished housing units mainly in the new towns and satellite cities and at the fringe of
existing cities. Many o f these public housing schemes continue to involve heavy government
subsidies. Overall, they have imposed a heavy burden on public finances, making such efforts
unsustainable, while satisfying only a small part of the demand.
13. The GOE i s currently in the process o f formulating proposals for a more efficient, targeted
and sustainable social housing finance program to serve the most disadvantaged groups of
society. The program may pilot an up-front, down-payment, cash subsidy scheme to assist the
purchase of a house within a limited price range by applicants satisfying certain income and
other social criteria. The proposed program would be expected to replace existing interest rate
subsidies. The GSF may manage the financial aspects of the program. The World Bank and
other donors are currently providing the Government with technical advice on various aspects o f
the proposed program.
3
2. Rationale for Bank involvement
14. Bank involvement would be fully consistent with the CAS (discussed below). Since
2000, the Bank has provided the Government with substantial policy and technical advice on
mortgage market development issues that has been of great benefit to the GOE in its laudable
efforts to develop the policy, legislative and institutional foundations for a mortgage market.
Among the important GOE achievements in which the Bank was engaged are the Mortgage Law,
related amendments to the Capital Markets Law to facilitate the issuance o f alternative forms of
financial instruments such as European-style mortgage bonds and eventual securitization, the
establishment of the MFA and the GSF, and the structural reform and reduction o f property
registration fees in 2006. Bank support for the proposed project would build upon this prior
technical assistance work. It would also bringbest practice expertise and world-wide experience
in alternative mortgage finance systems to the development of the emerging mortgage market
including the ECMR. As in the case of any complex, untested financial market with new
institutions, many unanticipatedpolicy, technical and institutional growing problems are likely to
arise. Bank support for the ECMR would also provide a strong confidence-building signal to the
financial market that shouldhelpto enhance the willingness of marketparticipants to invest in its
bond issuances without the need for any government guarantees to assuage risks. Bank
involvement would also respond to a related GOE request for the Bank to help play a
coordinating role in channeling the support of other donors to the financial sector within a
common framework.
3. Higher level objectives to which the project contributes
15. The higher level objective to which the project will contribute is the development of a
more competitive and efficient financial sector. As outlined in Annex 1 of the Egypt CAS of
May 20, 2005, this financial sector objective i s a key CAS supporting goal for an even higher
level strategic CAS objective of facilitating private sector development. The project would help
the GOE to develop new financial sector activities that are normally found in a modem, well-
functioning, financial system. An expected CAS outcome to be influenced by the Bank Group i s
the realization of a more efficient and responsive financial sector that includes a modem
residential mortgage market, for which the CAS envisages Bank intervention through project
lending.
16. The creation of a market-based residentialmortgage finance system is a highpriority GOE
and CAS goal because of the very substantial benefits it would generate for the economy and the
population, particularly in the housing sector. Also, it would facilitate progress towards the
realization of another important strategic CAS objective o f promoting social equity, by
improving access to longer-term housing finance, and, correspondingly, improving the
affordability of housing.
B. PROJECTDESCRIPTION
1. Lendinginstrument
17. The proposed Bank lending instrument is a financial intermediary loan. The loan
documents will comprise a Loan Agreement (LA) between the Borrower and the Bank, a Project
4
Agreement (PA) between the ECMR and the Bank, and a Subsidiary Agreement (SA) between
the Borrower and the ECMR. A condition for effectiveness will be the signature of an SA
satisfactory to the Bank. The Bank loan to the GOE will be structured as a Fixed Spread Loan
funded by Egypt's national currency paid-in capital (NCPIC) in Egyptian pounds. It will be on
standard country terms for Egypt and will comprise a 20-year maturity, including a 6-year grace
period, with annuity type of repayment. The front-end fee and the commitment fee will be
charged in Egyptian pounds and the same waivers will be applicable to this loan. Other terms
and conditions will be similar to those for a standard FSL. The features of the NCPIC loan are
discussedfurther.
18. The proceeds of the Bank loan will be on-lent by the GOE to the ECMR as a line of credit
denominated in Egyptian pounds at a market rate of interest. The specific methodology for the
on-lending arrangements will be defined in the Subsidiary Agreement to be executed as an
additional condition of effectiveness of the proposed Loan. The on-lending arrangements may
be structured differently than the NCPIC-FSL in order to better tailor themto the operational and
risk mitigation needs of the ECMR (refer Annex 4). The terms and conditions of the on-lending,
including benchmark interest rates which will be market-determined, shall be satisfactory to the
Bank. The selection of the benchmark interest rates will take into account their compatibility
with the mortgage refinancing activities of the EMRC and the formulation of the on-lending
arrangements will take into account the importance of establishing a sound asset-liability
management policy for the EMRC and of minimizing its exposure to financial risks. The
maturity of the subsidiary loan will be similar to that of the Bank loan. This will better facilitate
the provision by the ECMR of medium- and longer-term refinancing to PMLs, and also enable
the subsidiary loan to play a role as semi-permanent capital of the ECMR. Debt service
payments on the subsidiary loan will be subordinated by the Borrower to payments by the
ECMR on its outstanding bonds. This will provide investors inECMR bonds with an additional
measureof confidence and security.
2. Project development objective andkey indicators
19. The project's primary target group are the participatingmortgage lenders (PMLs) in the
primary financial market. The lack of long term funds available to primary lenders presents a
major obstacleto the flow of private funds to housing. Their mainsource of fundingat present i s
short-term deposits which they are not able to intermediate into long-term mortgage loans
without taking on unacceptable increases in their exposure to lending and other business risks.
Inaddition, most of the primary lendersdo not have sufficient market capacity to raise long-term
funds inthe capital market at attractive financial terms. The new ECMR will help to overcome
this obstacle through the refinance or purchase with recourse of longer-term mortgage loans
originated by PMLs.
20. Project beneficiaries include: (i) Egyptian households who may borrow longer-term
,mortgage loans, since this will greatly improve the quality of the housing they can afford; and
(ii) investorswhomaypurchasethesecuritiesthatwillhelptofundthemortgagemarket.
market
Tertiary project beneficiaries are the corporations and individuals involved in the construction
and buildingindustries andrelated services industries, which should experience related growth in
business and employment.
5
21. The project's development objective is for primary lenders in the financial market (viz.,
both banks and non-bank lenders) to provide longer-term, market-based mortgage loan financing
for residential housing. Such financing i s scarce at present, in part because primary lenders do
not have reliable access to sources of term finance on favorable terms that could help them to
mitigatethe associated business andlendingrisks. The ECMR will provide such a source.
22. Key project outcome indicators comprise: (i)the growth involume of market-based
mortgage loans extended by primary lenders, rising from a base of about LE 300 million to about
LE 4.0 billion over the period of the project; and (iii) lengthening of the term to maturity
the
structure o f mortgage loans offered in the market, risingfrom about 7 to 15 years over the period
of the project. The term extension i s important because it i s the major channel whereby the
impact of the project on the financial intermediationprocess helps to improve the affordability of
housing for individual households. Key intermediate outcome indicators are: (i) the number of
primary lenders extending mortgage loans, rising from two to over six over the period of the
project; and (ii) volume of PML borrowings from the ECMR, rising from nil to about LE 1.2
the
billion over the period of the project.
23. The main project output is the provision by the ECMR of medium- and longer-term
mortgage refinancing loans to PMLs under financially sustainable conditions and on a market-
basis. Output indicators comprise: (i)the growth of the ECMR's mortgage refinancing
operations; and (ii) the launch by the ECMR of bond issuances that are accepted in the market at
prices favorable for ECMR operations.
24. The project will be deemed successful provided: (i) the project's base case projections for
growth in mortgage lending by primary lenders and for the lengthening of the term structure of
mortgage lending are realized by the Closing Date of the project; and (ii)the ECMR, as an
important component of the financial sector necessary for the mortgage market to continue on a
growth path following the completion of the project, achieves financial sustainability on a market
basis.
25. Given its focus on building a new financial market, the project does not incorporate any
social housing finance or poverty alleviation goals or associated outcome indicators for which it
would be held accountable. In particular, it will not provide or offer any support for housing
finance subsidies. Sound housing finance practice dictates that housing finance subsidies should
be kept separate from market finance andnot allowed to distort financial market incentives.
3. Project components
26. The project comprises a World Bank loan in local currency in the amount of LE214.2
million (about US$37.1 million equivalent) to the Arab Republic of Egypt for on-lending to the
ECMR as a line of credit which it will utilize as one of its funding sources to provide medium-
and longer-term mortgage refinancing loans to PMLs on a market basis.
27. The World Bank loan will support the initial, start-up phase and strengthening of ECMR
operations. Another source of ECMR funding will comprise the paid-in equity investments of
shareholders. The ECMR i s being legally incorporated as a joint stock company with the
6
assistance o f the World Bank prior to Board presentation. It i s a wholesale (second tier),
specialized liquidity facility operating on commercial principles to attract the equity investments
of private parties. It will be majority owned by the users of its financial services, mainly the
PMLs (both active banks and real estate lendingcompanies). The Central Bank of Egypt (CBE)
i s a strategic investor with a 20 percent ownership share, and the GSF will have a small, two
percent ownership share. The IFC i s considering the provision of both an equity investment and
technical assistance from IFC PEP-MENA. Technical assistance may also be provided by
USAID under its on-going Financial Services Project (section C.1). As it matures, the ECMR is
expected to develop sufficient market strength and capacity to issue bonds or other securities in
the capital market on favorable terms in order to help fund its operations on a market sustainable
basis.
28. The ECMR will neither'take deposits nor lend directly to households. Its business i s the
refinancing or purchase with recourse of longer-term residential mortgage loans originated by
primary lenders for which it will raise term funding by issuing bonds and notes in the capital
markets.' This narrow mandate will strengthen the credit quality of the bonds and thereby help
to keep the ECMR's cost of funds relatively close to rates on government bonds. The ECMR's
transparency and simplicity will also help reduce the burden of regulation by the MFA. PMLs,
by borrowing from the ECMR, or at least by having the ECMR available when needed to serve
as first resort source of finance, will be better enabled to offer longer-term financing for
residential housing development on market terms and conditions that are favorable for many
potential homebuyers. Lenders will view the ECMR as a source o f liquidity they can tap at short
notice.
4. Lessons learnedand reflected inthe project design
29. Project design reflects lessons learned in similar projects in the MNA Region and
elsewhere. Similar projects implemented in Jordan and the West Bank and Gaza in the 1990s
pioneered mortgage market development in the MNA Region.2 The WBG project was also
supported by an IFC project. In the ICR for the Jordan project, project outcome was rated
satisfactory and project sustainability was rated as highly likely.3 A key lesson learned i s that
deepening financial markets, including secondary markets for loans and increasing institutional
investment opportunities, depends not only on creating frameworks for new financing
mechanisms, but also on conditions in the underlying market for primary lending and general
economic activity. In Egypt, improvements in the underlying primary lending market will be
supported by the proposed FSDPL (section A.l). The successes of the Jordanian project were
also owed to good financial and judicial fundamentals, extreme care in designing the liquidity
facility and its lending and borrowing mechanisms to avoid both uncertainties in financial
contracts and distortions in the sector, a level, competitive playing field among primary lenders,
'There are a number of international examples of liquidity facilities including the Federal Home Loan Banks in the
US, Cagamas Berhad in Malaysia, Caisse de Refinancement de 1'Habitat in France, the Jordan Mortgage Refinance
Company, and the Swiss Pfandbriefe Institute. These institutions have similar missions but somewhat different
structure, powers and privileges.
Jordan - Housing Finance and Urban Sector Reform Project (Staff Appraisal Report 15331-JO; Loan 4071-JO
approved on July 26, 1996) and WBG - Housing Project (Staff Appraisal Report 15926-WBGZ; Trust Fund26052
approved on April 8, 1997).
Implementation Completion Report NO.23518 of October 31,2002.
7
conducive property registration and titling processes, and a reasonably efficient housing market.
Other lessons are that in emerging mortgage finance systems, second-tier financial institutions
should start with basic financial products and narrow mandates in order for them to better
manage and control risks in relatively new and untested product markets, and that their
operations should be regulated or overseen by an experienced financial sector regulatory agency.
The design o f the proposed project has taken these lessons into account. Other important pre-
requisites for successful mortgage markets include reliable property registration systems and
effective legal andjudicial processes for mortgage foreclosure. Close attention has been given to
these pre-requisites duringproject preparation.
5. Alternatives consideredand reasonsfor rejection
30. Alternative structural formulations of the project have been considered, such as an
adaptable program loan, housing project, social development project, or development policy
loan. However, these alternative formulations would not be as efficient or effective to building a
market sustainable approach to housing finance, or to enabling the GOE to shift much of the
financial burden for housing finance to the private sector. Nor would they likely be as consistent
with the CAS goals that the project i s intendedto address.
31. The proposed formulation is also considered to be more suitable than a development
policy loan for addressing both the specific corporate financial needs of the ECMR and the need
for Bank involvement o f long duration in view of the systemic changes that the development o f
the mortgage market will entail. The learningcurve for market participants, including the MFA,
the ECMR, primary lenders, government institutions involved in complementary activities such
as property registration and titling, and other service institutions and agents such as appraisers
and realtors, is expected to be quite long and steep. The ECMR itself will involve substantial
systemic change, since it will be a new financial institution operating in an untested market.
Implementing the systemic changes will require close Bank support to the GOE over the
medium- to longer-term in order to help the GOE address the many difficult policy and technical
issues that must always be expected to emerge in the process o f building fundamentally new
markets and systems.
32. Another alternative i s the no-project or "without project" option, which was rejected.
Under this alternative, those few mortgage lenders having sufficient market strength to issue
their own financial instruments in the market would be able to avail themselves of this option,
although at the likely cost of higher borrowing costs (which would translate into higher rates on
mortgage loans) and less competition and innovation in the market. The financial instruments of
most PMLs would likely be perceived in the market as being much more risky than the ECMR,
and thus receive less favorable terms. The state-owned commercial banks may be able to issue
bonds in their own name on favorable terms, should the market perceive them to be guaranteed
by the GOE, but in such case the GOE could, in turn, take on substantial market risks
unintentionally. It would also tend to defeat the purposes o f the GOE's banlung sector reform
program.
33. Under the "without project" option, it might also be argued that a private sector entity
could undertake the provision of ECMR services independently if the market would value them
8
highly enough. One reason that this event can be considered unlikely i s the presence of
externalities in the form of benefits that the ECMR will bringto the development of the financial
market which cannot be fully captured or internalized by a totally private entity. Nearly all
liquidity facilities in the world have generally required some degree of government sponsorship
to become established.
34. In Egypt, government intervention in establishing the ECMR is desirable for several
reasons:
0 The ECMR should become an important tool to develop the Egyptian financial markets;
0 The ECMR will play an important role for the banking sector by offering banks a safe
channel to lendtheir excess funds to other credit institutions;
0 Being a major source of funding for competing PMLs, the ECMR will be a first resort
and market-based liquidity provider versus a similar but last resort role played by the
CBE;
0 The ECMR, even as a majority privately owned institution, will play a crucial role in
setting up prudentiallending standards for the nascent residential mortgage markets;
0 The GOE would retain the authority to ensure a balanced development by keeping access
to the ECMR open to all qualified PMLs, while also helping to preserve the ECMR's
credit rating and low exposure to risks, and being responsive to the development needs of
the PMLs; and
0 Some state presence would help to assure closer cooperation with the government
authorities responsible for the development of domestic bond markets.
C. IMPLEMENTATION
1. Partnershiparrangements(ifapplicable)
35. The Bank and USAID have collaborated closely during the preparation of the project.
This collaboration will be continued during project implementation. USAID i s implementing a
complementary project, Egypt Financial Services (EFS), launched in November 2004 (refer
Annex 2 and Appendix 4.2)). The EFS Project comprises a five year program of technical
advisory services and institutional capacity buildingto help strengthen the regulatory framework
for the mortgage market, the property registration system, and dispute resolution and
enforcement o f mortgage collateral.
36. The close collaboration between the Bank and USAID seeks to eliminate duplication,
emphasize the respective strengths of the two institutions, and make more optimal use of
available grant and loan resources available to the GOE.
2. Institutionalandimplementationarrangements
37. The Ministry of Investment (MOI) will oversee the project and be responsible for
addressing any major policy, institutional or cross-sectoral implementation issues that should
arise. The ECMR, once it becomes fully operational, will assume day-to-day responsibility for
implementation of the project. Until then, implementation responsibility will rest with an MOI
Task Force, chaired by the Chairman of MFA, which over the past year has been responsible for
preparing the project. By January 15, 2007, the Borrower will establish an Advisory Committee
9
to review and advise the Minister of Investment on any cross-cutting policy issues related to the
efficiency of the mortgage market, property registration and enforcement of mortgage loan
contracts that may arise during project implementation. It will comprise senior officials of the
MOI, Ministry of International Cooperation (MOIC), Ministry of Justice (MOJ), Ministry of
Housing, Utilities and New Communities (MOH), MSAD,,Central Bank of Egypt (CBE), MFA,
ESA, ECMR, and other concerned authorities, many of whom are participants in the existing
Task Force. The Advisory Committee Chairman will be designated by the Minister of
Investment.
38. The ECMR will also be responsible for the financial managementof the project, including
consolidations of the records of the executing agencies and the maintenance of project books of
accounts and quarterly financial management reports (FMRs). As a condition for loan
disbursement, the ECMR will establish a Financial Management Information System (FMIS)
that complies with the Bank's requirements for administration, reporting and transaction
recording.
3. Monitoring and evaluation of outcomes/results
39. The project outcome and output indicators are measurable or have correlates that are
measurable. The ECMR will track changes in the volume of market-based mortgage loans
extended by primary lenders and in the loan term to maturity offered by mortgage lenders,
through regular surveys of lenders, reviews of annual audited accounts of lenders, and other
marketsources of information. All of the output indicators relate to ECMR activities and will be
tracked by the ECMRin the normal course of business.
40. The MOI, through the Advisory Committee, will monitor the policy, institutional and
regulatory environment for the mortgage market in order to guard against potential risks for the
project. One of its main focuses will be on the implementation of the GOE's reformprogramin
property registration, as indicated particularly by the increase in registered ownership rights in
the new urban communities through systematic registration processes. The Advisory Committee
will also carry out surveys that would seek to gauge the impact of the project on various sectors
of the mortgage market. The Advisory Committee will also be responsible for recommending
any requiredremedial measures to the Ministerof Investment.
41. Bank staff will give special attention to the regulatory and institutional environment
during the course of project supervision missions, particularly the performance of the MFA in
monitoring and overseeing the legal and regulatory compliance of the ECMR and non-bank
mortgage lenders.
42. The M O Iwill also carry out a mid-term review not later than March 1, 2009, for which it
will prepare an evaluation report that will draw upon these sources of information, seek to draw
conclusions regarding lessons learned and issues and impediments encountered, and make
recommendationsfor addressingany identifiedproblem areas.
10
4. Sustainability
43. The project is expected to be sustained by several factors that have either been
implemented prior to presentation of the proposed loan to the Executive Directors of the Bank, or
which are being addressed by the GOE with the assistance of USAID, or which have been
incorporated into the project design. These include:
The concurrent implementation by the GOE of structural reforms in the banking
sector, with the support o f the FSDPL;
Recent reforms by the GOE to the legal framework for mortgage lending, such as the
enactment of the new Mortgage Law and of amendments to the Capital Markets Law,
that are supporting structural changes in the financial market having largely
permanent effect;
The design of the ECMR as a financially sustainable, corporate entity, with a profit-
making goal and majority ownership by commercial financial institutions. Over the
medium to longer-term the ECMR will rely for funding on issuing bonds and other
securities inthe capital market;
The concurrent implementation by the GOE of its national property registration
reform program, including the recent reduction in property registration fees to levels
that are much more affordable and attractive to households desiring to register their
properties, while also assuring financial sustainability o f the registration and cadastre
functions;
On-going USAID technical assistance and training for institutional capacity building
and reforms of the mortgage market regulatory framework and of the property
registration system;
The implementation recently of three FIRST Initiative Projects sponsored by the
Bank to support improvements inbanlungsupervision, the credit information system,
and the payments system; and
Additional support for financial sector development currently being provided by the
USAID andthe European Union.
5. Criticalrisksandpossiblecontroversialaspects
44. The project i s relatively simple in structure since it comprises only one major component
inthe form of the ECMR's mortgage refinancing program. However, the project entails several
significant risks related to the macroeconomic framework, the policy, regulatory and institutional
environment in which the ECMR will operate, the policies, processes and procedures for
property registration andjudicial enforcement of mortgage collateral, the operational policies and
modalities of the ECMR itself, and uncertainties in market behavior.
45. The key risks and risk mitigation mechanisms are summarized in the table below.
However, by far the most serious risk to the achievement o f project outcomes are the constraints
to property rights registration and transfers in urban areas. This risk i s discussed in detail in
Annex 4, which also describes the other risks more fully.
11
46. There is also risk related to the readiness of the Borrower's financial management (FMS)
system. Therefore, the establishment of an FMS system satisfactory to the Bank will be made a
condition for disbursement (refer Annex 7).
Risks RiskMitigation Measures Risk
Rating
with
Mitigation
To project development
objective:
(i) Macroeconomic On-going GOE financial sector reform program N
framework
(ii) Property registration GOE pricingpolicy reform; GOE national property registration reform S
program; USAID EFS project assistance; close risk monitoring by MOI
Advisory Committee and Bank staff
(iii)Collateral Recent reforms enacted inMortgage Finance Law; MOJ training M
enforcement and programs; USAID EFS project assistance
foreclosure processes
(iv) ECMR performance ECMR ownership and management structure (majority private sector M
ownership but with CBE shareholding; narrow businesscharter and
mandate; detailed business plan; regulatory treatment approved by CBE;
implicit private sector performance incentives
To component results:
(i) regulatoryand
Policy, ECMR ownership structure aligned for appropriate incentives on both N
institutional environment GOE and ECMR investors; recent GOE policy and institutional reforms
refinancing
(iii) ofECMR
Quality Performance incentives inherent inECMR ownership structure N
management
(iv) Capital market Narrow, low risk ECMR mandate and structure; CBE participation in M
reception of ECMR ECMR Board; treatment o f subsidiary World Bank loan to ECMR as
bonds subordinated debt
Overall risk rating: M
6. Loanconditionsandcovenants
47. Loan effectiveness conditions: Signature of the Subsidiary Agreement, satisfactory to the
Bank (section B.1and Annex 4).
48. Covenants applicable to project implementation: The Loan and Project Agreements
include covenants relating to: (i) institutional and other implementation arrangements; (ii)the
modalities and prudential treatment o f the ECMR; (iii) terms and conditions of subsidiary on-
lendmg arrangements between the Borrower and the ECMR; (iv) terms and conditions of
participation agreements between the ECMR and PMLs; (v) terms and conditions of mortgage
loans; (vi) property rights registration; and (iv) establishment of a financial management system.
12
D. APPRAISALSUMMARY
1. Economicandfinancial analyses
49. The proposed project i s expected to: (i) participating mortgage lenders to mitigate
help
important lending risks associated with housing loans and to increase their lending for housing
finance; (ii)facilitate an increase in the flow of private sector funding to the housing finance
sector; and (iii) improve the affordability of housing finance through a lengthening o f the term to
maturity of mortgage loans.
50. The term finance provided to PMLs by the ECMR will help them to reduce the liquidity
risk (i.e., the risk that the money will be neededbefore it is available) incurred intheir provision
of long term loans for housing. Housing i s a long-lived, durable good. In order for housing to be
affordable to households, the payment stream should be spread out over a number of years,
facilitating a match between the benefits received and the costs of the dwelling. Most PMLs in
Egypt are commercial banks that rely on abundant short-term deposits for their funding. They
are reluctant to extend long-term (e.g., over 5 year) loans for housing because of the liquidity
risk inherent in funding such loans with short-term deposits. Real estate lending companies
(RELCs), the newly licensed non-bank primary lenders, have no access to cheaper deposits and
depend more critically on long-term external refinancing. By providing an easy access for both
types of PMLs to bond finance at any time, the ECMR will enable the PMLs to make more
housing loans, increase the flow of funds to housing and improve the affordability of housing
finance in Egypt. The PMLs will also be able to utilize the ECMR to improve the efficiency of
their portfolio and risk management activities, which should help to lower financial spreads in
the market to the benefit o f all borrowers of credit, especially homebuyers.
51. The ECMR will also help to facilitate increased competition in the mortgage market by
creating a funding source for non-depository lenders, promote the development of safe and sound
mortgage credit standards, and help fixed-income securities markets in Egypt to further develop.
The project however will not be held accountable for progress in these areas. At a later stage of
development, likely well beyond the period of this project, the ECMR may gradually be
transformed into a securitization company capable of purchasing mortgage loans without full
recourse, which will help to further expand the scope and depth o f the mortgage market, and/or it
may be combined with a mechanism for partial credit insurance in order to help expand
household access to mortgage finance from primary lenders while also providing credit
enhancement for bond investors.
52. Indirect benefits that are likely to result from the project could include increased housing
supply, particularly when viewed in combination with the GOE's property registration reform
program. The project may induce further expansion of direct foreign investment in housing and
of rental markets for real estate. However, new housing construction facilitated by the project
would be in established population centers which the beneficiaries themselves would select, and
therefore displacement and relocation of residents would not be an issue.
53. Financial assumptions and projections for the ECMR are discussed in Annex 10. In the
base case scenario, the ECMR i s modestly profitable in year 2 and remains so during its first 5
years. The ECMR provides a projected LE 750 million of PML refinancing during its first 5
13
years with its target spread falling to 50 basis points in the fifth year. The low volume
assumption results in a relatively high ratio of expenses to assets (reflecting a high proportion of
fixed to total cost although the level of expenses in Egyptian pounds does not exceed LE 5
million until the fifth year) and a low ROE. As a result there i s little room for further reductions
inthe ECMR spread.
54. Inthe fast growth scenario the ECMR provides a projectedLE 1.55 billion inrefinancing
during its first 5 years but still does not yet need any recapitalization. It achieves a healthy ROA
of 2.4% or more starting in its second year. The ROE rises steadily during the scenario, reaching
21.75% in the fifth year even with the spread falling to 50 basis points. The owners could reduce
the spread faster and most likely increase the volume of activity if the economic environment
remains strong.
55. The commercial viability of the ECMR, as indicated in the financial analysis, does not by
itself ensure that the ECMR will generate net economic and social benefits, as discussed in
Annex 10. However, at a minimum, economic benefits are expected to accrue to: (a) mortgagors
(households), from a combination of lower costs of funds and a longer term on the mortgages
being offered, as well as from greater interest in lenders to pursue housing finance lending; (b)
lenders, from a reduction in the risks associated with longer-tern housing loans, thereby
enabling a reduction in the price and non-price barriers to longer-term borrowing; (c) the capital
market, from improved information on term structures and risks that should reduce the cost of
issuingmedium- and long-term debt. The project is also expected to generate significant social
benefits, described in below in Section 3. These benefits however have not been quantified.
2. Technical
56. During project preparation, alternative PML funding approaches or models that could
fulfill similar purposes as the ECMR, such as a securitization conduit, were also considered and
evaluated. However, relative to a securitization conduit, the ECMR will require lower volumes
of activity to operate efficiently and lessen the degree to which the GOE will need to expose
itself to credit risks during the early, untested phase of mortgage market development. It i s also
simpler and quicker to establish, yet has sufficient flexibility to eventually evolve into a
securitization conduit ifthis should be needed at a later stage o f market development. InEgypt,
amendments to the Capital Markets Law in 2004 provided the legal foundation for mortgage
securitization by any private sector financial institution that may choose to pursue securitization
on their own. The rationale for choosing a liquidity facility fundingmodel for Egypt i s discussed
more fully in Annex 4.
3. Fiduciary
57. The ECMR will be regulated by the MFA established by the MOI pursuant to the
Mortgage Law to regulated non-bank financial institutions including the ECMR. However, the
CBE, which i s a strong, independent regulator, will also play a major role in respect o f the
ECMR, by taking a minority shareholding of 20 percent and appointing one member of the
ECMR Board. In addition, the MOI will also appoint one member o f the Board. The CBE has
14
also approved a package of prudential regulatory treatments for the ECMR to help ensure
efficient operations. Annex 4 gives a fuller discussion of regulatory oversight o f the ECMR.
58. As a new institution, the ECMR has no prior experience with World Bank projects and
thus i s not familiar with the Bank's fiduciary requirements. The project however will not
involve procurement o f goods or services, nor are there any applicable safeguards.
Disbursements will constitute the primary area of fiduciary requirements. In this regard, the
ECMR i s a second-tier financial institution which will disburse its refinancing loans against
evidence of eligible mortgages made by PMLs, and not against evidence o f goods or services
financed by the PMLs. Disbursements of the Bank loan will be documented by this same
evidence. Accordingly, the establishment of a satisfactory financial management system will be
made a condition for disbursement of the proposed loan.
4. Social
59. In the initial, formative stages of Egypt's new and untested mortgage market, primary
lenders are likely to find it difficult to properly evaluate and manage the associated business
risks. They are therefore likely to target households whom they perceive to be lower risk, which
in Egypt may be middle income and upper, lower income households. The ECMR will operate
on a purely market basis, and there will be no direct linkages between its operations and
government support for social housing. In recognition of this, the GOE i s formulating a
completely separate social housing finance program with the assistance o f the Bank and other
donors (section A.l). However, as the mortgage market gradually matures and the associated
business risks become better understood, which will likely occur well beyond the project
implementation period, primary lenders may be expected to expand their activities to include
households who are lower down inthe income spectrum.
60. In order to enhance efficiency in the treatment of gender in housing finance, mortgage
loans refinanced by the ECMR will require that, if the beneficiary is a married couple, that both
spouses have signedthe mortgage contract, unless a spouse signs a written waiver.
61. Principal social benefits, which may take several years beyond the project implementation
period to achieve, include: (a) better housing conditions for most borrowers for housing, who
should gain from improved access to mortgage finance and lengthened mortgage maturities that
should significantly increase the level of housing quality that they will be able to afford; (b)
improved resource efficiency for the Government in its efforts to meet the social housing needs
of the most disadvantaged of society, since it will be better able to reduce budgetary expenditures
and risks of housing development for middle income households and transfer these to the private
sector; and (c) enhanced employment opportunities for homeowners derived from the increased
worker mobility that a more efficient real estate market will allow. The project however will not
be held accountable for these outcomes.
5. Environment
62. The project i s classified as Category C. The project is not expected to have any direct or
adverse impact on the environment. Since the project will promote increased efficiency in the
15
housing finance system, environmental problems derived from sub-standard housing conditions
shouldbe reduced. The building regulations and codes governing urban development and land
use planning, which cover the construction of housing units, are adequate to ensure against
environmental degradation.
6. Safeguard policies
Safeguard Policies Triggered by the Project Yes No
~~
Environmental Assessment (OP/BP/GP 4.01) [ I [XI
Natural Habitats (OP/BP 4.04) [I [XI
Pest Management (OP 4.09) [ I [XI
Cultural Property (OPN 11.03, beingrevised as OP 4.11) [I [XI
Involuntary Resettlement (OP/BP 4.12) [I [XI
Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I [XI
Forests (OP/BP 4.36) [I [XI
Safety of Dams (OPBP 4.37) [I [XI
Projects inDisputedAreas (OPBP/GP 7.60)* [ I [XI
Projects on International Waterways (OP/BP/GP 7.50) [ I [XI
7. Policy Exceptionsand Readiness
63. The project does not require any exceptions from Bank policies. However, it should be
noted that the proposed Bank loan will provide financial support for the refinancing by the
ECMR of residential mortgages that, in turn, cover financing, in part, of both land and existing
housing stock. This activity i s consistent with Bank policy that permits such financing provided
that the project is a financial sector operation andthat the Bank loan would not finance landonly.
64. The project meets MNA Region criteria for readiness for implementation. As a condition
for Board presentation, the ECMR will have been legally incorporated with the shareholders'
initial equity capital paid-in.
65. The IFC is also considering an investmentinthe ECMR and, separately, IFC PEP-MENA
i s considering the provision of technical assistance to the ECMR.
~
* By supporting theproposed project, the Bank does not intend to prejudice thefinal determination of the parties' claims on the
disputed areas
16
Annex 1:Country and Sector or ProgramBackground
ARAB REPUBLICOFEGYPT-MORTGAGEFINANCEPROJECT
RecentMacroeconomicDevelopments
1. Real GDP grew by 4.2 percent in 2003/04 and 5.1 percent in 2004/05 after the anemic 3
percent during 2001-03. The external sector has thrived with exports receipts (including from
tourism and Suez Canal earnings) rising by 25.5 percent in 2004/05 versus 31.9 percent in
2003/044. The stock market is booming and there are signs of increasedinvestor confidence with
rating agencies (Fitch, and Standard & Poor) raising Egypt's economic outlook from negative to
stable last year.
2. The large current account surplus and low international indebtedness help insulate the
economy from external shocks. The current account surplus was a substantial US$2.9 billion in
2004/05 (3.3 percent of GDP), only slightly smaller than 2003/04's US$3.4 billion (4.3 percent
of GDP). Net international reserves have risen to an ample US$ 22.5 billion (March 2006), or
over seven months of imports and almost eight times Egypt's debt service. External debts were a
modest US$29 billion5(31.2 percent of GDP) in June 2005 of which less than 7 percent was of
short maturities and the bulkis of 20 year maturity with a 4 percent average interest rate.
3. Economic management has improved in recent years. The authorities are ensuring that
the management of the exchange rate, monetary and fiscal policies i s consistently coordinated,
and appropriate tools are being developed; towards this end, the CBE had to ensure a smooth
functioning o f the exchange rate market and develop a more comprehensive monetary policy
framework. The authorities announced that they would target inflation over the medium term
and the exchange rate regime i s now a managed float although the pound's nominal exchange
rate with the dollar i s kept within a narrow band after a recent nominal appreciation (to around
5.75 per U S dollar).6 Egyptian CPI declined from its October 2004 peak of 18.2 percent to 3.7
percent in March 2006. Broad monetary aggregates have risen by over 13 percent last year,
mostly due to the increase innet foreign assets.
4. The overall government budget deficit7 and net government domestic debt are high (9.6
and 65 percent of GDP respectively, Table-I) although government revenues are substantial at
The Government set up "Qualified Industrial Zones" inDecember 2004 where products manufactured with
11.7 percent of Israeli-origin components have tariff-free entry into the United States.
Under the 1991Paris Club agreement, external payments were rescheduled but the local currency equivalents of
public enterprises' external borrowings were deposited per the original schedule in a "blocked account" at the
Central Bank o f Egypt. This amounts to LE70billion (over US$12 billion).
The pound was pegged to the dollar until2000, a series o f step devaluations followed until2002, and a managed
float was first attempted in2003 but succeeded in2004. The divergence betweenthe official and parallel market
exchange rates disappeared by late 2004, thereby eliminating rents and arbitrage. The surrender requirement on
export proceeds was eliminated inSeptember 2004 and an inter-bank foreign exchange market was established in
December 2004.
'The definition of "government" (central and local levels plus public service authorities) remains unchanged since
2000. The Egyptian budget classification and hence deficit data are being improved since 2005 and The Ministry of
Finance has reclassified fiscal data back only to 2001/02 making the earlier series non-comparable. Official data for
"General government" (that also includes the NIB and the SIFs) are not yet available, and the IMFestimates these.
This report uses official data to make it easier for the authorities.
17
around a quarter of GDP. The income tax law of July 2005 simplifiedthe rate structure, halving
personal and corporate tax rates while raising the minimum threshold to broaden the tax base.
Tax administration i s improving with increased inspection and the creation of a dedicated large
taxpayer unit.8 The general sales tax i s being modified to become a full-fledged VAT system.
The level and dispersion of customs duties were reduced in August 2004 (the number of tariff
bands fell from 27 to 6), customs procedures simplified, reducing the weighted average tariff
from 14.6 percent to 9.1 percent.
5. High government expenditures, their allocation, control and the poorly targeted subsidies
are of concern and the authorities are improving budget management. The Ministry o f Planning,
(responsible for the investment budget) and the Ministry of Finance are beginningto control the
numerous off budget accounts, estimated at over 4 percent of GDP. Subsidies that state-owned
enterprises provide through under-priced goods and services are gradually being included
explicitly in the budget, and such improved classification and transparency will allow better
allocation and control. Even so, some 50 economic authorities (some quasi commercial,
affiliated with line ministries) still operate outside the budget.
6. The government budget i s consolidated for 14 line ministries, 26 governorates, and 82
public service agencies, but there are about 5,000 accounts that are not centrally controlled.
After the cabinet agrees to the proposed single Treasury account (under the Ministry of Finance
purview), Parliament would have to amend the state accounting law. So despite the progress,
much remains to be done.
7. The overall government budget deficit however remains worryingly high. The authorities
recognize that budget deficits o f nearly 10 percent of GDP are unsustainable and have indicated
that they plan to reduce the budget deficit gradually by over 1% of GDP in each of the next five
years, bringingit down to 4 percent of GDP by 2010/11. Whether this could be done remains to
be seen: the authorities must skillfully balance prudent economic management and public
I
sentiment that has long been accustomed to the subsidies. The Bank is working with the
government to identify several poorly targeted subsidies and improve the effectiveness o f public
social spending (e.g. the study of the social safety net).
8. The budget deficit is financed through increased domestic borrowing, largely through the
Social Insurance Fund (SIF holds 40% of the domestic debt) and the banlung system that holds
more than 95 percent of the Treasury bill stock (70 percent o f which are held by the state-owned
banks) and funds about 4.3 percent of GDP during each of the last five years. Banks' excessive
financing of budget deficits results in their losing lending skills (e.g. assessing credit risks and
malung and collecting on loans).
* Preliminary data for 2005/06 show individual income tax revenues increasing by 17 percent and a 30 percent
increase in the number of tax payers.
18
Table 1: Main Macroeconomic Indicators
FiscalYear (July-June) 2001 2002 2003 2004 2005
Rate of Growth
Real GDP (at factor cost) 3.4 3.2 3.0 4.3 5.1
Real Consumption 4.7 2.7 2.4 2.1 5.4
Real G.D. Investment -4.0 5.5 -5.9 6.3 9.3
Exports Volume 6.8 6.3 4.8 22.7 10.5
Imports Volume -12.0 -2.8 -19.4 13.4 16.3
GDP Deflator 2.4 2.4 3.2 11.5 9.7
Percent of GDP
Gross Domestic Investment 17.7 17.8 16.3 16.4 17.2
Net govcrnrncnt debt 64.9 71.3 75.8 73.9 76.0
-of which: net doinestic debt 54.3 58.4 60.4 60.4 64.7
Outstanding ForeignDebt 28.5 33.7 42.5 38.1 31.2
Current Account Balance 0.0 0.7 2.4 4.3 3.3
Gross National Savings 17.8 17.6 17.9 17.6 17.8
Overall Govt.BudgetDeficit 10.2 10.5 9.7 9.6
FinancialSector
9. The financial sector has been the subject of various reform efforts over the past decade.
The reforms have aimed mainly at financial liberalization, developing more effective financial
instruments, strengthening the financial system's infrastructure, and enhancing competitiveness
through increased private sector participation. As a result of these reforms, supported inter-alia
by a World Bank adjustment operation in 1991, Egypt has significantly modernized its financial
system and provided increased autonomy and power to the monetary and regulatory authorities.
Despite these positive steps, the financial sector continues to face important challenges that were
identified by an FSAP in 2002. These challenges include the low levels of competition and
financial intermediation in the primary market (with large liquidity in the banking system), low
levels of credit to the private sector, relatively high intermediation costs, limited innovation and
dominance of state ownership. The banking system is burdened by a high level of non-
performing loans, while the non-bank segment i s characterized by underdeveloped bond,
insurance, and mortgage markets, thin trading in equities, weak corporate governance, and weak
infrastructure for effective payment systems. The proposed FSDPL and the proposed Mortgage
Finance Project will support the Government's efforts to address a number of financial sector
issues and needs.
10. Banlung plays a central role in the financial system, accounting for more than 60 percent
of the system's assets. Total bank assets amount to about 100 percent of GDP. Credit to the
private sector, which accounts for a modest 58 percent of GDP (compared to an average of 110
percent in OECD countries) has been the main source o f growth in bank's assets over the past
decade despite a decline registered during the last three years. The banlung system i s dominated
by state ownership, with four public commercial banks (namely the National Bank o f Egypt
(NBE), Banque Misr,Banque du Caire, and Bank of Alexandria), and three specialized public
Net government debt is defined as the sumof the government's external and domestic debt: the latter includes net
claims on central and local governments, municipalities and public service authorities. (Ministry of Finance,
Financial Monthly, February 2006).
19
banks (namely Egyptian Arab Land Bank, Industrial Development Bank of Egypt, and Principal
Bank for Development and Agricultural Credit) accounting for more than 58 percent of the
system's assets. Public banks have an extensive branch network, and hold equity capital in most
joint venture banks. Public banks earn lower net interest margins and have higher operating costs
than private banks, and have been slow to modernize and innovate. The poor quality of their
portfolio with high levels of nonperforming loans i s now widely acknowledged. Although
private and joint venture banks are growing faster than their public sector counterparts, they
remain relatively small, with modest branching. The dominance of public banks is not conducive
to reform and progress interms of financial sector modernization and innovation.
11. The non-bank financial institutions have a large, untapped potential for development and
growth. They comprise a stock exchange sizable in terms of market capitalization but still
shallow in turnover, and a relatively small contractual savings sector including insurance, funded
pensions and mutual funds, and underdeveloped mortgage and ancillary financial institutions.
The stock market displayed some positive trends recently; market capitalization increased
significantly in 2005 reaching the equivalent of 56 percent of GDP; total annual value o f trading
increased, and stock market indices rose sharply. The insurance sector, dominated by public
ownership, i s underdeveloped with annual premiumincome of 1.1percent o f GDP. Competition
tends to be based on price rather than product innovation. Combined insurance and private
pension funds under management amount to LE 32.8 billion (June 2004), equal to only 8 percent
of GDP, which i s a relatively low level for a middle income country. Mortgage markets remain
underdeveloped and limited in scope and activity. Ancillary financial firms such as leasing
companies are present, but remain undeveloped, while venture capital firms and factoring
companies are hardly existent with some related financial services being provided by the
operating banks.
HousingFinance System
12. The Government has been taking steps to develop an efficient enabling environment for a
modern residential mortgage market. The new system i s expected to significantly increase the
affordability o f housing for borrowing households, mostly through longer loan maturities. For
example, extending average terms from 5 to 15 years would augment average loan-to-value
ratios from a current 25%-30% range to about 45%-50%, according to the estimated incomes of
households and actual prices of suppliedhousing units (mostly targeted for middle-income urban
households purchasingunitsin the price range o f LE 100,000 - LE 150,000).
13. To lay the foundations for a residential mortgage finance system, the Government i s also
tahng steps to ensure that:
0 the macroeconomic framework is satisfactory;
0 an efficient and low cost system for registering and transferring property titIes and
mortgage liens i s put in place, since this is essential for an efficient mortgage market to
function. Inefficiencies and deficiencies in property registration, especially, impose high
economic costs and risks to lenders and dissuade them from offering longer-term housing
finance;
0 the judicial system recognizes and i s willing to enforce creditors' liens on owner-
occupied residential property;
20
0 the judicial system permits and promotes an efficient, effective and predictable
foreclosure process in the event of defaults;
0 prudential capital adequacy rules specify differential reporting requirements and capital
requirements for banks' assets collateralized by residential property, in order to set the
stage for risk-based pricing of longer-tern loans (i.e., lower interest costs for more secure
lending); and
0 systems that develop and disclose reliable market and other information on the housing
sector are developed.
14. In 2001, the Government enacted Real Estate Finance Law 148 (viz., Mortgage Law)
which sets out the legal foundations for market-based housing finance, building upon best
practices from around the world, including improved collateral enforcement and foreclosure
processes. More recently, it has taken steps to strengthen the legal and institutional framework
for mortgage securities through amendments to the Capital Markets Law, establish a new
regulatory framework for real estate activities, and promote the formation o f new, non-bank real
estate lending or mortgage companies. To date, two non-bank real estate finance companies
have been established and commenced initial operations. In 2003, a new Ministry of Investment
(MOI) was established with well-targeted private sector and financial sector mandates including
the development of a mortgage market. In July 2004, Presidential Decree No. 201 established a
new Mortgage Finance Authority (MFA) with a mandate to regulate the mortgage market. Most
recently, an MOI Task Force, with the assistance of the Bank, spearheaded the preparation and
incorporation o f a new mortgage finance company for mortgage refinancing (viz., Egyptian
Company for Mortgage Refinancing) that, when fully operational, will enable qualified mortgage
lenders to access tern refinancing for their mortgage loans and to better manage various risks of
mortgage lending.
15. Pursuant to the provisions of the Mortgage Law, the Government has also recently
established another new institution, the Guarantee and Subsidy Fund (GSF). The GSF's initial
role is to provide a temporary social safety for borrowers who experience adverse life events
such as a loss of employment that lead to payment defaults, while also implicitly providing a
form of credit enhancement for lenders. It would finance up to three monthly mortgage
payments on behalf o f borrowers in times of demonstrated social hardship. The costs of the
temporary safety net would be covered by fees on mortgage loans.
16. The GSF may also undertake more market-oriented activities in the future. Consideration
may be given to: (i) pre-titling guarantees for housing lenders, in order to cover credit risks for a
limited period until the mortgage lien i s registered on the property title; and (ii) a mortgage
insurance program covering a limited level of credit risks. The GSF will exercise a small
government shareholding inthe ECMR including representation on the ECMR Board.
17. To mitigate potential risks of policy and institutional distortions emerging as a result of
having both market-based functions and subsidy support functions under the same institutional
umbrella, the related organizational and budgetary functions of the GSF are expected to be
separated in a clear and transparent manner.
21
Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies
ARAB REPUBLICOFEGYPT-MORTGAGEFINANCEPROJECT
1. World BankFinancedProjects: None
2. OtherDevelopmentAgency FinancedProject:
USAID EgyptFinancialServices Project(EFS)
1. EFS assistance to the GOE targets four major areas:
- Establishment of a supporting framework for the real estate finance industry
- Improvement o f the registration system for urban real properties
- Development of a framework and procedures for secured lending for new financial
instruments
- Establishment o f a broad-based credit information system
2. Of particular importance for the proposed Mortgage Finance Project, the EFS project is
providing substantial technical assistance to the GOE for capacity building of the MFA and the
implementation of the national property registration reform program (refer Appendices 4.1 and
4.2). In addition, EFS is also assisting a number of private sector organizations including,
principal partners such as the Egyptian Real Estate Association, Egyptian Mortgage Brokers
Association and Egyptian Appraisers Association, International Federation of Surveyors (Egypt
Chapter), Egyptian Judges Association, Egyptian Lawyers Association, Egyptian Real Estate
Surveyors Association and nascent homeowners /homebuilders and property management
associations.
FinnishCadastralInformationManagementProject(ECIM)
3. The Finnish Government, through the Egyptian Cadastral Information Management
Project (ECIM), has provided assistance to improve collection, managementand use of cadastral
information in rural areas operating under the title registration system through automation of the
offices of the Egypt Survey Authority (ESA), software design, digitalization of cadastral maps,
and improved linkages with the Real Estate Publicity Directorate (REPD) of the Ministry of
Justice (MOJ) and the Real Estate Taxation Department (RETD) of the Ministry o f Finance
(MOF). In the process of designing the system an attempt was made to rationalize and
streamline the present business processes for land registration.
4. The significance o f the E C I M project for the proposed project i s its substantial work to
date on designing a modem cadastral information system and re-thinking the current business
processes involved in the relationship between ESA and REPD offices in land registration.
However, thus far the system has been limited to internal ESA use and the linkages with REPD
have not yet been established. At this time the level o f assistance consists primarily of technical
assistance and advice, and there will be no further procurement of equipment and software for
other ESA offices. Finnishassistanceto the E C I Mproject i s expected to close inFebruary 2007.
22
3. GOE Projects
RuralTitle Registration
5. This recently launched project is focused on implementing improvements to the rural title
registration system. It i s a joint effort of the Ministry of Communications and Information
Technology, Ministry of Agriculture, Ministry of State for Administrative Development
(MSAD) and ESA. The GOE project will seek to resolve existing data discrepancies and
improve the quality of information in the system, digitize ESA maps, and create a digital
interface between the graphic and textual databases of the ESA and REPD offices.
Dokki Systematic Inventory Project
6. In pursuit of its commitment to implement the Law 142 title registration system in the
urban areas, the GOE, through M S A D and in collaboration with MOJ, ESA and the RETD,
initiated with its own funds a systematic cadastre and real property inventory project in the
D o h district o f Cairo. D o k i s a district having approximately 56,000 real property objects
subject to registration.
7. The purpose of the Dokki pilot was to assess the feasibility of systematic conversion of
the district from the deeds recordation system to the title registration system by assessing
conditions on the ground and the capabilities of local ESA and REPD offices, and i s the first
project of its kindin urban areas. The Dokki project was carried out as an experiment to identify
potential issues and problems that may be encountered when establishing the title registration
system in urban areas. An important outcome o f the Dokki project i s greater understanding
within government of the importance o f the physical cadastre and index mapping activity as a
foundation for the systematic registration process. The lessons learned are helping to strengthen
the foundations o f the national property registration program.
23
Annex 3: ResultsFrameworkandMonitoring
ARAB REPUBLICOF EGYPT-MORTGAGEFINANCEPROJECT
ResultsFramework
CAS Goal:
Development of a more competitive and efficient financial sector, including a market-based residential mortgage
finance system
PDO ProjectOutcomeIndicators Use o
Primary lenders provide longer-term Growth involume of market-based
market-based mortgage loan mortgage loans extended by primary During project implementation to
financing for residential housing lenders (annually) assess project performance and
redirect it if necessary
Lengtheningof term to maturity
structure of market-based mortgage
lending
IntermediateOutcomes e
Primary lenders begin competing to Primary lenders establish mortgage
offer mortgage loans lending operations During project implementation to
assess project performance and
PML's begin borrowing from the redirect it if necessary
ECMR
Outputs OutputIndicators Use of OutputMonitoring
The ECMR offers refinancing to Growth in volume o f ECMR During project implementation to
PMLs under financially sustainable refinancing loans to PMLs assess project performance and
conditions and on a market-basis redirect it if necessary
ECMR launches bond operations at
favorable market prices
24
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Annex 4: DetailedProjectDescription
ARAB REPUBLICOFEGYPT -MORTGAGE FINANCEPROJECT
Introduction
1. The proposedMortgage Finance Project comprises a World Bank loan in local currency in
the amount o f LE 214.2 million (about US$ 37.1 million equivalent) to the Arab Republic of
Egypt. The proceeds of the Bank loan will be on-lent as a line of credit (viz., subsidiary loan) to
the Egyptian Company for Mortgage Refinancing (ECMR), a specialized liquidity facility and
the project's implementing institution. Detailed features of the ECMR are described in
Appendix 4.1.
Terms and Conditionsof the SubsidiaryLoanto the ECMR
2. Initially, the market rate o f interest to the ECMR will be indexed either to swap market
rates or to a medium-term government security traded in the capital market plus an estimated
premium to reflect the additional risk of future ECMR securities over government equivalents.
Later, when the ECMR issues its own bonds, the interest rate on new draw-downs of the Bank
loan will be set in accordance with the rates received by the ECMR on its own, recent bond
issuances. The selection of the benchmark interest rates will take into account their
compatibility with the mortgage refinancing activities of the EMRC and the formulation o f the
on-lending arrangements will take into account the importance of establishing a sound asset-
liability management policy for the EMRC and of minimizing its exposure to financial risks.
The interest rates received for each draw-down may vary depending on market conditions at the
time of draw-down.
Disbursementof the World BankLoan
3. Disbursements from the Bank loan will be made against receipt by the Bank of
standardized documentation evidencing the mortgage loans being refinanced by the ECMR,
including evidence that the mortgage loans have been made for residential housing and satisfy
ECMR credit policy criteria. For example, each mortgage loan beneficiary will be required to
occupy the mortgaged housing primarily for residential use, and the ratio of the mortgage loan to
the appraised value of the property must not exceed 80 percent. Disbursements are expected to
be low in the first year o f ECMR operations, both because the ECMR and the mortgage finance
system will be in its infancy, and also because the ECMR will need to await the availability of
seasonedmortgaged loans having good repayment records, before it can accept them as collateral
for its refinancing loans to PMLs.
World BankLendingInstrumentStructure
4. The Bank loan to the GOE will be structured as a Fixed-Spread Loan funded by Egypt's
national currency paid-in capital (NCPIC) in Egyptian pounds. Taking into account a scarcity of
precise estimates for the Bank's borrowing cost in the Egypt market, and in recognition of the
GOE's willingness to facilitate the usability of funds for NCPIC lending, the Bank assumes
Libor minus 55 basis points as a borrowing cost in Egyptian pounds. The lending charge in the
local currency term will be determined using market currency swap quotes. Should the tenor of
swap quotes that the Bank i s able to obtain from the market be shorter than the maturity of the
loan funded by NCPIC, the Bank will extend such swap rate to the end of the loan maturity. The
26
front-end fee and the commitment fee will be charged in local currency since NCPIC funded
loans are approved and committed in the local currency. Standard waivers for the lending
spread, the front-end fee and the commitment fee will be applicable to NCPIC funded loans.
Project Risks
5. The main sources of risks are the macroeconomic framework, the policy, regulatory and
institutional environment in which the ECMR will operate, the processes and procedures for
property registration and judicial enforcement of mortgage collateral, the operational modalities
of the ECMR itself, and uncertainties in market behavior. These are discussed below.
6. The risk of adverse changes inthe macroeconomic framework or financial environment is
considered to be low. The GOE i s currently taking many important steps to improve the
functioning of the economy and the financial sector, for which support i s or will be provided by
the proposed FSDPL and donor-funded projects of the USAID, the EUand others.
7. Pricing and systemic constraints to efficient registration and transfers o f property rights
pose a substantial risk to project outcomes, and will be very closely monitored by both the
Advisory Committee and Bank staff during project implementation. The property registration
constraints are described in section C.5 and more fully in Appendix 4.2. They are expected to be
mitigated by several factors. First, the GOE has enacted major reductions in the fee structure
that are expected to generate a significant increase in consumer demand for registration. Second,
the GOE has undertaken to implement several urgent measures to alleviate current bottlenecks in
the new urban communities, which are expected to be the main source o f demand for mortgage
loans, at least in the initial stages of market development. Third, the GOE has recently launched
a systematic title adjudication, survey and registration process in order to modernize the property
registration system over the next several years. In support of this program, which will also start
in the new urban communities, the USAID EFS Project includes substantial technical advisory
and institutional capacity buildingservices, training and technical facilities.
8. The effectiveness of legal enforcement o f mortgage collateral including foreclosure
processesunder the new Mortgage Law poses another significant risk to project outcomes. Since
such legal enforcement i s still untested, interested lenders may approach the market gingerly at
first until there i s greater certainty that collateral can be recovered effectively and efficiently
through the judicial system. To help mitigate this risk, the Ministry o f Justice has launched
training programs on the features o f the Mortgage Law that justices must complete before being
permitted to hear cases under the new law. In addition, the USAID EFS Project includes
technical assistance to the MOJ for the reform of administrative rules and practices relating to
foreclosure on real estate. A fuller discussion o f the laws o f mortgage and o f real property in
Egyptis given inAppendix 4.3.
9. The performance of the ECMR as a first resort re-financier to primary lenders i s an
important risk factor for both project outcomes and project outputs/results, because in the
absence of satisfactory ECMR performance the capacity o f lenders to manage the associated
financial risks will be greatly reduced. The ECMR will be an entirely new kind of financial
institution in Egypt, operating in an untested market, and having operational modalities that are
financially complex. It will be exposed to and have to manage a variety of risks, including credit
27
risk (the risk of borrower default), cash flow funding risk,-including liquidity risk and interest
rate risk (the risks of cash shortfall andor a mismatch between the rates on its assets and
liabilities), operations risk (the risk of a mismatch between its costs and revenues), foreign
exchange risk (the cash flow risk associated with issuing debt in one currency and lending in
another along with the risk that domestic currencies could not be converted into foreign
currencies to meet the obligations of the company for mortgage refinancing) and political risk
(the risk of a major change in the legal, regulatory or tax framework). There i s also a risk that
the capacity of the ECMR to go to the capital market and carry out bondoperations to raise funds
to meet loan demand may develop more slowly than expected, requiring a larger line of credit to
support its initial operations than currently estimated. This risk will be mitigated by the ECMR's
narrow, low risk mandate, its detailed business plan, and the participation of the CBE in ECMR
ownership.
10. These risks are significant but manageable. In general, factors mitigating these risks
include, first, the formulation of the structure and operational modalities of the ECMR that
reflect best practices learned from similar institutions and operations elsewhere in the world.
These are discussed more fully in Appendix 4.1 together with further details on ECMR policy
measures to mitigate the above-mentioned risks. Second, a narrow charter and a detailed
business plan have been formulated for the ECMR that greatly constrain how it may and may not
operate in the financial market. Third, the Board o f the ECMR will be constituted with
financially astute CBE officials and senior representatives o f financial institutions. These risks
will be further mitigated if the LFC should decide to invest in the ECMR and take a seat on the
Board.
11. For project outputs, there i s a risk that demand from mortgage lenders for ECMR
refinancing may not rise to the levels envisaged in the time frames predicted at the time of
project appraisal. In this regard, the ECMR will be demand driven, not supply driven, and the
demand for ECMR refinancing i s difficult to predict. It depends on several factors, such as
levels o f liquidity in the financial market and potential market constraints such as property
registration, discussed above. For some highly liquid lenders, the mere existence of the ECMR
as a fallback financier may be sufficient for them to engage in mortgage lending, while other
lenders may need to utilize the ECMR on a regular basis in order to offer mortgage loans.
Demand could also prove to be higher than estimated, particularly if property registration does
not present as serious a supply constraint to mortgage finance as anticipated at appraisal, or ifthe
Mortgage Law should be formally reinterpreted by the GOE to allow adjustable rate lending;
currently, all lending i s required to be at fixed rates. Adjustable rate lending could help to
further reduce lender risks significantly inthe new and uncertain market environment.
12. There i s a negligible risk to project outputs that a future government may decide to change
the market-friendly policy and regulatory environment o f the ECMR to the detriment or benefit
of one party or another in the market, or desire to use the ECMR as a conduit for subsidies. This
risk will be mitigated by the ownership structure of the ECMR which includes a minority
government shareholding that will provide an incentive for the GOE to maintain a favorable and
equitable policy environment, and a majority private sector shareholding dispersed widely
among lenders and investors that will help to guard against uses of the ECMR that may hinder or
28
distort its ability to carry out its market-based functions efficiently. Should the IFC decide to
take an equity participation inthe ECMR,this risk will be further mitigated.
13. Overall, these risks may combine in various ways to slow the pace at which retail primary
lenders develop and expand their mortgage lending operations as well as the onset of significant
competition among them that will help to keep interest rate spreads in the market low. When
viewed in the context of the project's expected benefits, these risks are considered acceptable.
Rationalefor Selectinga Liquidity Facility FundingModel for Egypt
14. There i s a wide range of mortgage funding models which may be classified into three
basic groups:
0 Portfolio lending models, which are more or less traditional ways of doing mortgages.
The essence of such models i s that lenders, typically banks, sometimes specialized banks,
originate loans directly or through origination networks and hold the loans in their own
portfolio funded by their own debt, which could be retail deposits (typically short term)
and/or longer term instruments like bonds.
0 Liquidity facilities, which allow portfolio lenders to borrow against their mortgages,
giving the lenders an extra way of raising money when their usual source, such as retail
bank deposits or shareholders' equity, i s difficult or costly to access. This i s not really a
separate model but rather a supplement to the portfolio lending model. It is also an
alternative to securitization because it provides access to capital markets.
0 Securitization models, in which lenders sell mortgages to a secondary market entity,
which sells claims, mortgage-backed securities, into the capital markets. This i s a
relatively recent development that can take advantage of robust bond markets if they are
present.
15. It should be noted that these alternative funding arrangements all require to some extent
the same pre-requisites for the development o f the mortgage market, including a strong legal
infrastructure supporting the registration, enforcement and eventual pledging and/or sale of
mortgage loans. Most of them (deposit-based portfolio lendingbeing the mainexception) rely on
the existence or development of a robust bond market, to the extent they look to the selling of
fixed-income securities.
16. All three models are similar in their basic goal of linkingmortgage markets with the rest
of the financial system. To a large extent the choice among systems has been determined by
history; e.g., the U.S. securitization system arose out of the Depression and some regulatory
problems for thrift institutions. Choices going forward, for countries starting from a nascent
stage, are likely to be determined by existing frameworks (foreclosure laws, strength o f existing
markets such as bond markets and deposit markets, and the ability of the legal system to support
securitization). The strength and robustness o f the legal and judicial framework i s especially
important. Securitization tends to be more demandingof the legal structure because investors in
mortgage-backed securities are often at an informational disadvantage relative to the institutions
that sell them loans and are likely to be more dependent on the house as collateral and the ability
to enforce contracts than would be the case for a portfolio lender who had access to more
information about the borrower.
29
Should banks not be able to access long-term funds on an unsecured basis (and in the absence of
a supervisor for mortgage bonds), then a liquidity facility may be a superior means of using the
loans as collateral, because it introduces a third party which can examine the collateral and
minimize moral hazard. Also, as a centralized bond issuer, the facility can often obtain better
access on more favorable terms than its owners/members. With a greater volume of assets they
can access the markets more often, creating greater liquidity in their debt and negotiating better
terms with underwriters. By lending to a number of institutions, they can achieve greater
diversification in their asset base. Bonds issued by private mortgage lenders (banks and non-
bank lenders) would likely be perceived by the market as more risky than those of the liquidity
facility, and therefore.receive less favorable terms. Some state banks may be able to issue bonds
in their own name at favorable terms, because they would in effect be guaranteed by the GOE.
Inthis case, however, the GOE could inadvertently take on substantial market risks. Thus, both
state banks and private lenders should consider a liquidity facility to be one of their most
attractive and competitive fundingalternatives.
17. A liquidity facility is also much simpler and quicker to establish that a government-
sponsored securitization conduit, yet can also be designed to eventually evolve into a
securitization conduit. To work effectively and at low cost spreads, securitization requires the
existence of a more robust institutional infrastructure such as rating agencies on which investors
can rely for accurate information and assessments of the issued securities and also credit
enhancement from the collateral (Le., over-collateralization), cash flow (e.g., senior-subordinated
securities) or third parties (e.g., pool insurance provided by mortgage insurers or bond insurers)
to manage the credit and agency risk inherent in third party origination and servicing. It also
requires large volumes of mortgages to be securitized in order to keep costs low. The GOE
might also need to provide additional insurance or guarantees in order to attract security
investors at favorable terms. In comparison, a liquidity facility will likely entail significantly
lower costs and risks for the GOE, since it should require lower volumes of activity to operate
efficiently and effectively and should also reduce the degree to which the GOE would need to
expose itself to credit risks during the early, untested phase o f mortgage market development.
Overall, therefore, the GOE has decided that the liquidity facility funding model i s its preferred
approach.
30
Appendix 4.1
Features of the Egyptian Company for Mortgage Refinancing
Introduction
1. The Egyptian Company for Mortgage Refinancing (ECMR) i s a specialized liquidity
facility operating in the wholesale (second-tier) mortgage market. Its initial narrow mandate i s
to mobilize funds in the capital market and use them to refinance mortgage loans extended by
participating mortgagelenders (PMLs) in the primary market, including banks and non-bank real
estate lending companies (RELCs). Under the project, it will only refinance mortgage loans for
the purchase or renovation of residential property. It can neither take deposits nor lend directly
to households. It will operate on commercial principles to attract the equity investments of
private parties and lever market-based funding for primary lenders at attractive conditions.
2. The operations of the ECMR will help to address a major obstacle to the flow of private
funds to housing, namely the lack of a mechanism to mobilize long term funds that can then be
intermediated by PMLs for residential mortgage lending. The World Bank line o f credit will
help to finance the initial, start-up phase of ECMR operations. As soon as possible, the ECMR i s
expected to become a well-rated and regular issuer of bonds inthe capital market, andfinancially
sustainable on a marketbasis.
3. The initial narrow mandate of the ECMR will not address all funding needs of primary
lenders, in particular for off-balance sheet finance. The charter of the ECMR will allow for
future non-recourse purchase and securitization through a separately capitalized subsidiary.It i s
not advisable to conduct such business currently or in the near future due to the lack of portfolio
history, lender experience with credit risk management, the difficulties o f monitoring originator
and servicer behavior andthe absence of complex (e.g., amortizing, callable, tranched) securities
inthe bondmarket.
4. The institutional structure within which the ECMR will operate is shown in Exhibit 1. It
will raise funds initially through long-term loans from institutional investors and equity
contributions from the founding investors, and It will make refinancing loans to PMLs (only to
banks and RELCs) collateralized by mortgage loans or will purchase their eligible mortgage
loans for a limited period at full recourse (i.e., the PML commits to buy back any ineligible or
defaulting loan).
MarketRole of the ECMR
5. The ECMR will provide term finance to PMLs in order to reduce the liquidity risk (i.e.,
the risk that the money will be needed before it i s available) incurred in their provision of long
term loans for housing. Housing is a long-lived, durable good. In order for housing to be
affordable to households, the payment stream should be spread out over a number of years,
facilitating a match between the benefits received and the costs of the dwelling. Most PMLs in
Egypt are commercial banks that rely on abundant short-term deposits for their funding.They are
reluctant to extend long-term (e.g., over 5 year) loans for housing because of the liquidity risk
inherent in funding such loans with short-term deposits. The newly licensed RELCs have no
access to cheaper deposits and depend more critically on long-term external refinancing. By
31
providing an easy access for both types of PMLs to bond finance at any time, the ECMR will
enable PMLs to make more housing loans, increase the flow of funds to housing and improve the
affordability of housing finance in Egypt. The ECMR can also facilitate increased competition
inthe mortgage marketby creating a funding source for non-depositorylenders.
Figure 1: Egyptian Company for Mortgage Refinancing
I L Loans I L
6. The ECMR will be a centralized bond issuer facilitating the development o f the Egyptian
bond market through frequent issuance of standardized, high quality debt. It will provide PMLs
with a cost-effective way to access the capital markets. As a repeat issuer o f high quality
securities, the ECMR will lower the fixed transactions cost of bond issuance and achieve greater
liquidity in its securities than individualissuers.
7. As a limited-purpose institution, the ECMR will be able to develop the expertise
necessary to manage foreign exchange and funding risk effectively, providing benefits for the
entire emerging Egyptian financial system. The success of this structure has been proven in a
number of other countries. The ECMR will be a repository of mortgage market knowledge and
expertise benefiting all mortgage market participants. An additional benefit will be a positive
role in setting appropriate standards for PMLdocumentation and underwritingof mortgages.
Legislation of the ECMR
8. The ECMR has been chartered as ajoint-stock company governed by the Companies Law
159/1981 and the Mortgage Finance Law 148/2001 and its executive regulations. The narrow
mandate specified in the charter will help to ensure that the ECMR concentrates its activities in
support of the housing sector through residential mortgage markets. Activities in the areas of
commercia1 property and construction finance will be disregarded during the inception phase.
The ECMR i s legally empowered to refinance credit institutions with an immediate and priority
access to their mortgage portfolios (in case o f a PML bankruptcy), issue a large amount of tax
exempted bonds, enjoy all creditor's rights including foreclosure, and be subject to effective
financial oversight despite its not being a depository bank. Its conservative operations will be
important assets in its efforts to establish the pristine reputation necessary to ensure that it can be
32
a high quality bond issuer, capable of obtaining competitive yields without government support.
The ECMR w i l l not amend its legislation in any manner which would adversely affect the
implementation of the Project.
Ownership
9. The E C M R will be majority owned by its PML subscribers (both active banks and
RELCs). The charter will have restrictions on share transfer to maintain user control and access
to all qualified lenders, as well as periodic and/or exceptional re-capitalization by the main users
inorder to preserve the rating and soundness of the ECMR. Mortgage lenders will be requiredto
be shareholders of the ECMR in order to have access to ECMR refinancing loans. Domestic
equity may be complemented by that of international investors (e.g., the IFC) who can contribute
technical assistance to the ECMR.
10. The Central Bank o f Egypt (CBE) i s a strategic investor with a 20 percent ownership
share. The Mortgage Guarantee and Subsidy Fund (GSF) will have a small equity stake of two
percent. Although the debt issued by the ECMR should withstand close scrutiny as to credit risk
and represent attractive term placements for investors, the presence of a strategic government
investor will help to strengthen the creditworthiness of the ECMR." Moreover, customer
ownership creates a positive incentive for efficiency and prudent risk management in order to
insure refinancing i s available at the best rate. It i s anticipated that the GOE will eventually sell
its equity stake in order to fully privatize the ECMR. Privatization can be accomplished through
a one-off sale o f shares o f the ECMR or gradually through required share purchases by its users.
Regulation
11. Having a credible regulator i s an important characteristic of the ECMR. Investors in
ECMR debt securities will take comfort in the supervision of the regulator for safety and
soundness and capital adequacy. As a non-depository and non-banlung specialist mortgage
institution, the ECMR will be regulated by the Mortgage Finance Authority (MFA). The CBE
will provide support to the MFA as an extension of its oversight functions for the banlung system
inorder to help strengthen the capacity of the MFA and inview of the role the ECMR will play
in enhancing the liquidity and bond issuance options of banks and other lenders. The Capital
Markets Authority (CMA) will oversee the ECMR's bond issuances. The Borrower, through the
MOIand the MFA, will ensure that the ECMR adheres at all times to prudent credit policies and
asset-liability management policies that satisfy internationally accepted standards.
Corporate Governance
12. The ECMR will have a board of directors appointed by its shareholders, including
representatives of the financial sector and government. In its initial configuration as a
government-sponsored corporation, the ECMR will have nine directors as follows:
Public Directors: Two including one from the CBE and one from the Ministry of Investment;
Private Directors: Four including the Managing Director;
Independent Directors: Three including the Chairman of the Board.
loLiquidity facilities in Jordan, Malaysia and Trinidad have minority central bank ownership, since the liquidity
facility's mission is closely related to that of a central bank in maintaining systemic liquidity.
33
13. Voting will be by simple majority. The initial board will be appointed for five years and
following which appointments will be for three years. An Internal Audit Department will be
established which will report functionally to the Board and administratively to the Managing
Director.
Organization and Staffing
14. The ECMR will maintain a Managing Director with qualifications and terms of reference
satisfactory to the Bank. As a wholesale institution, the ECMR can operate with a small but
capable staff who can undertake a wide range of assignments and duties. At start-up, the ECMR
is expected to comprise a staff of eight to ten senior professionals. External law firms however
may be contracted to fulfill complex initial activities (e.g., refinancing contracts, bond issuance
models). The organization of the ECMR will include separate departments for Accounting and
Financial Management, Internal Audit, Legal, Credit, Treasury, Marketing, Operations and
Research.
RegulatoryPrudential Treatment
15. As a unique and specialized institution in Egypt, the treatment of the ECMR's loans and
securities, lending and investment authority and tax status must be determined in advance by
special decrees. These treatments are summarized in Table 1. The ECMR's narrow lending and
investment mandates are designed to limit its credit risk exposure and ensure that its efforts are
focused on the refinance of housing loan portfolios. The MFA, which is the ECMR's regulator,
will take steps to ensure that the ECMR adheres at all times to prudent credit policies and asset-
liability management policies that satisfy internationally accepted standards. ECMR mortgage
refinancing loans will be partially exempt from banks' general loss provisioning requirement of
3 percent and will be made subject to a one percent provision to reflect the more conservative
underwriting o f ECMR-qualified loans and the additional oversight of bank lending it will
provide. ECMR debt securities will be eligible investments for banks, insurance companies and
institutional investors, reflecting their high credit quality. ECMR bonds will be included in the
definition of liquidassets for banks.
16. As a financial institution, the ECMR will also have to satisfy capital adequacy
requirements imposed by the MFA and (debt) investors. The initial capital adequacy requirement
i s 4 percent reflecting the low credit risk of the ECMR's operations. Ultimately the ECMR's
capital adequacy requirements will have to be in line with the risk o f its operations. A risk based
capital adequacy requirement taking into account credit, interest rate, liquidity, foreign exchange
and operations risk will be formulated by the MFA.
Initial Capital
17. The ECMR's authorized capital will be LE 1.0 billion, but it will start operations with an
initial capital base of LE 200 million given the nascent state of the primary mortgage market, the
conservatively forecast early funding needs o f the ECMR, and the ample short-term liquidity
recorded b y major banks at the present time. The ECMR will have a leverage limit of 25:l
reflecting its low risk and limitedpowers. Its authorized capital can therefore support nearly LE
2.5 billion in lending. ECMR subscribers may be required to inject additional capital at the time
of borrowing as the ECMR may require based on their usage of the ECMR. In this way, the
ECMR will be able to expand its capital in relation to its lending activities.
34
Taxation
18. The net income of the ECMR would be taxed according to the same treatment accorded to
companies (20 percent rate). In addition, the bonds issued by the ECMR would receive the same
tax treatment as corporate bonds listed on the stock exchange, with interest and capital gains
exempt from taxation.
Table 1:Summary of Structure
Issue Structure
Charter Egyptian Joint Stock Company governed by companies' law 159 of
1981 and Mortgage Finance law 148 of 2001 and its executive
regulations.
Board of Directors Board of Directors comprised of 9 members of which 3 are independent
members ( includingChairman) and 6 representing the shareholders
Supervision MFA with support from CBE
Ownership Subscribers (78%), the CBE (20%) and the GSF (2%), with the CBE
and the GSF gradually phasing out over the mediumterm. .
Initial Issued Capital LE 200 million
Activity 0 Refinance to PMLs securedby residential mortgage portfolios with
an over-collateralization ratio of 120% and full recourse basis.
(initially with full recoursebut eventually without recourse but with
appropriate credit enhancement)
Investment Policy: 0 GOEtreasury bills and bonds
0 DeDosits inbanks
Debt Instruments 0 Bonds, mortgage backed securities and notes
0 Refinancinglines from the World Bank and the MOF
0 Commercial bank lines of credit
Incentives for investors in 0 Eligible Investment for banks and institutional investors
Bonds 0 Bonds eligible for bank liquidity requirements
0 Interest as well as capital gains on listed bonds will be tax exempt
Incentives for borrowers Mortgage refinancing loans will be partially exempted from banks'
general loss provisioning requirements of 3% and will be subject to
a 1% provision only.
Tax Treatment Standard corporate tax treatment
Sources of Funds
19. Loans. The initial source o f long term funds for the ECMR will be a credlt line to support
the company's operations until it has developed sufficiently enough for it to raise funds in the
domestic bond markets on the basis of its own financial and institutional strength. The Bank
local currency loan will be on lent by the GOE to the ECMR at market rates. In addition, the
MOF is expected to provide a term loan at government bond yields to the ECMR. Over time, the
ECMR is expected to steadily decrease its reliance on the World Bank and MOF loans and
increase its reliance on its own issued securities. The GOE will allow the ECMR to subordinate
its debt service payments on the Bank loan to its repayments of its bonds, as an indirect credit
enhancement mechanism.
35
20. Bonds. The ECMR will issue a variety of debt securities to manage its cash flow needs
including commercial paper, variable and fixed rate bonds of various maturities. The primary
source of funding for the ECMR will be notes and bonds sold in the domestic capital market.
ECMR will securitize the assigned financial rights, it will issue bonds against a pool of
assignedtransferred financial rights from primary market lenders and by that will become a
central bond issuer. Such securitization may be done by ECMR or a separately capitalized
subsidiary or a SPV. The bonds will initially be simple term corporate debt. The high credit
quality and favorable regulatory treatment should make the ECMR's debt attractive to domestic
investors (e.g., banks, insurance companies) and help stimulate the development o f this market.
As the market matures, the ECMR may issue longer term and more complex debt instruments, to
match the characteristics o f its loans. The M O F may be authorized to purchase ECMR bonds to
support the market duringthe first 5 years of its operation.
Investments
21. The ECMR will maintain an investment portfolio for liquidity and asset-liability
management purposes. To minimize credit risk, the investment securities will be limited to issues
by government. Inthe future, the ECMR may seek foreign funds. To minimize foreign exchange
risk investment securities will be denominated in the currency in which its debt will be issued.
The ECMR will also maintain a local bank account for cash management.
MortgageRefinancingOperations
22. The goal of the ECMR i s to enable private sector financial institutions to provide finance
for residential housing in Egypt. It will do so by providing a source of liquidity and long term
finance to primary lenders. The ECMR will enter into Participation Agreements, under terms and
conditions acceptable to the Bank, with eligible PMLs who satisfy the Credit Risk Management
Policy and eligibility criteria of the ECMR. There are two vehicles the ECMR can use to
provide such funds; collateralized lending where mortgage loan collateral i s pledgedby the PML
to the ECMR, and mortgage loan purchase with recourse to the PML in the event the loan
becomes defective (e.g., some or all of the risks associated with the mortgage loan remain with
the PML). The legal form varies significantly between these two main options, although their
financial features and related risks are similar. The ECMR's first seven mortgage refinancing
loans will be subject to prior Bank review. Also, the ECMR will prepare annual business plans
acceptable to the Bank prior to their adoption by the Boardof the ECMR.
23. In order to safeguard against the risk of a decline in the value of the pledged collateral
(e.g., ifinterest rates rise and the loan rates are fixed or if house prices fall and the incidence of
borrower default increases) and account for the potential costs associated with servicing or
liquidating the collateral, the ECMR will require its mortgage refinancing loans to be over-
collateralized by 120 percent. Thus if the ECMR makes a LE 10 million loan to a PML, it will
require LE 12 million in collateral. In accordance with a contractual lending agreement, PMLs
will be responsible for maintaining adequate collateralization as loans pay off or become
delinquent by three months or more. PMLs will be required to replace any defective collateral.
They will have the flexibility to substitute other forms of collateral (cash equivalents or
government-related debt securities) as well as mortgage loans. The ECMR will develop
standards and guidelines for acceptable collateral (e.g., mortgage loan type, maximum loan-to-
value ratios, loan size, first lien mortgage, past credit performance).
36
24. The ECMR will also take other steps to reduce credit risks, through prudent credit
assessments o f the PMLs and through diversification (e.g., limiting PML loan size and the size of
individual loans that serve as collateral). It will also receive a super-lien over pledged collateral
relative to the general creditors of the PML. Inthe event of a default by a PML, the ECMR will
have the right to liquidate the mortgage collateral in order to satisfy its loan. In the event of a
PML bankruptcy, the ECMR will take ownership of the mortgage collateral and can transfer
servicing of it to a third party. Prior to entering into a Participation Agreement with any eligible
PML, the ECMR will duly adopt and maintain a Credit Risk Management Policy (including
eligibility criteria for PMLs to access ECMR credit) and an Asset-Liability Management (ALM)
Policy, satisfactory to the Bank. The ALM policy will cover: (i) investment policy; (ii)interest
rate management policy; (iii)liquidity management policy; and (iv) capital adequacy
management policy.
25. The terms of the ECMR's mortgage refinancing loans may be simple (e.g., non-
amortizing term loans) or complex (amortizing, callable loans) depending on the requirements of
the PMLs. Initially, however, the ECMR will start with loan terms of only one to five years
which will be extended to seven to 10 years as it i s able to extend the maturity o f its bond issues.
Also, in order to minimize liquidity risk, ECMR loans will initially have bullet maturities with
no prepayment provisions that are matched to the expected characteristics of its debt. They may
have either fixed or variable rates, depending on the requirements of the PMLs.
26. The alternative to collateralized lending i s loan purchase subject to recourse or external
credit enhancement. Borrowers may sell mortgage loans to ECMR at par value for a specified
period of time (e.g., 3 - 7 years) and agree to repurchase the loan at the end o f the period. If the
loan and borrower are in good standing, ECMR may renew the purchase for another finite
period. This alternative i s somewhat more complex than over-collateralized lending and will be
developed later. All loans will be assigned initially with full recourse. If delinquent or defective,
the PML will be obliged to reacquire the loan at par. In the future, after the market has further
developed, the ECMR may consider non-recourse purchases (with matching securitization),
either directly or through a separately capitalized subsidiary.
Mortgage Loans of PMLs
27. The ECMR's Participation Agreements with the PMLs will require the mortgage loans
extended by the PMLs to meet certain criteria in order for the loans to be eligible for refinancing
by the ECMR. Among these criteria are requirements that an eligible mortgage loan may be
made by a PML only: (i) to creditworthy beneficiaries; (ii) the Loan-to-Value (LTV) ratio i s at
if
least 80 percent; (iii) if the beneficiary be a married couple, that both spouses have signed the
mortgage loan contract, unless a spouse signs a written waiver; (iv) if each beneficiary has
undertaken to occupy the housing to be acquired under the mortgage loan primarily for
residential use; and (v) if the mortgage loan contract includes provisions ensuring the right of the
PML to execute foreclosure upon failure of the beneficiary to perform its obligations under the
mortgage loan.
37
Appendix 4.2
Property Rights Registration
1. Pricingpolicy issues as well as supply side constraints and bottlenecks have long hindered
the efficiency of property rights registration and transfers in urban areas. Since this could
become a serious constraint to mortgage finance, it i s a significant risk to project outcomes. The
ability to efficiently register property title and related mortgage deeds is a necessary foundation
for collateralized, low risk mortgage lending which requires the presence of a sound system for
identifying, validating and protecting rights to property and for establishing mortgage rights and
priorities. The existing deeds recordation system however i s outmoded and inefficient, slow and
difficult for prospective registrants to navigate, and until recently has also entailed high fees that
have greatly deterred registrations. The registration system, particularly in the new urban
communities which are expected to be an important source o f demand for mortgage finance,
needs to be streamlined in order to alleviate current bottlenecks, while the entire system needs to
be modernized over the medium-term in order to facilitate efficient long-term growth and
development of both the mortgage finance system and the housing market.
2. The following features are illustrative of the current situation:
0 It is estimated that fewer than 20 percent of the apartment properties in the greater Cairo
region are formally registered inthe names of their current owners and occupants;
a The registration process can take as long as 1-2 years for typical sale transactions, and
only 1in 6 applications for registration are actually completed;
a In the deeds recordation offices in Cairo, it is estimated that only about 5-6 applications
for registration are processed per staff member per year;
0 Long delays andhighcosts (3% of transaction value) induce citizens to avoid registration
in favor of much cheaper and quicker, but less protective, court procedures which
validate purchase and sale contracts. At present, it i s estimated that about half of the
cases before the courts involve resolution of real estate disputes and validation of real
estate transactions, diverting the courts from their essential role o f dispute resolution;
0 Only a handful of the cadastre and registration offices have been automated, and systems
and procedures are mostly paper based.
3. The GOE is therefore moving forward on three fronts. First, it has recently taken steps to
alleviate the demand side constraint of high registration fees by enacting a new law that will
reduce fees substantially from about 3 percent by value of the property to be registered, down to
a flat fee structure with a ceiling of LE2,000 (about US$350 equivalent). The new law however
allows for lower fees on a sliding scale which may be established by the Minister of Justice. In
addition, the GOE intends to significantly reduce fees for "first registration" o f titles in the
registry as an incentive for homeowners and homebuyers to come forward to register their
property titles, especially for low value properties in order to encourage low and moderate
income homeowners to register. In this regard, it i s rare for registration fees today in most of the
world to exceed 0.5% of property or transaction value (Le. a fee o f about LE 400-500 for an
apartment valued at LE 100,000) and many are significantly lower.
38
4. Second, in consultation with the Bank, the GOE has formulated measures to alleviate
existing bottlenecks to property registration in the new urban communities, which the GOE
intendsto implement in the short-term. First,policies and procedures will be put in place by the
Ministry of Housing and the Ministry of Justice that will enable titles to houses/apartments to be
registered without first requiring the registration of title to the underlying land. Second,
procedures will also be instituted for delivering titles to home buyers immediately upon
allocation o f the land subject either to a mortgage securing payment of the land purchase price,
or else in exchange for a guarantee of payment or performance from a financial institution,
Third, the current practice of not deliveringtitles to individual landplots until construction on all
land plots in a large project are completed, which can sometimes take several years, will be
changed. Instead, all land plots in apartment development projects will be treated as subdivided
property units, title to which can be registered regardless of the status of other land plots in the
project. Fourth, a contractual burden will be placed on apartment developers to assure that titles
to apartments are ready to be delivered to purchasers upon completion o f a building. In this
regard, the GOE, through the M O I in consultation with the respective ministries, will take all
necessary steps by January 31, 2007 to simplify, streamline and expedite the processes of
residential property registration in the new urban communities within the context of its national
property registration program, described below.
5. Third, the GOE has recently initiated a national property registration reform program in
urban areas both to register housing units and to change, through a systematic title adjudication,
survey and registration process, the property registration system from the deeds recordation
system to a more efficient title registration system. To help facilitate mortgage market
development, the reformprogram has been formulated to include a major focus on the new urban
communities. The initial stage of the program includes nine locations, including two or more
new urban communities, which are targeted for completion by the end of 2006. However,
implementation o f the title registration system i s expected to take several years to complete. In
this regard, the GOE has described the modalities of this program in a letter to the Bank dated
June 5,2006.
6. The legal framework for title registration already exists in the form of Law 142 of 1964,
and title registration has been implemented previously in about 80 percent o f the rural areas of
Egypt, albeit haphazardly. Implementing title registration inurban areas will therefore result in a
uniform national system. The national property registration program i s expected to help reduce
many of the administrative constraints over the longer term. The title adjudication and
registration process will also provide an opportunity for households to record their property titles
in the name of the wife in addition to the customary name of the husband. The USAID EFS
project i s providing substantial technical assistance for program implementation.
7. The Bank endorses the GOE decision to pursue the development o f a title registration
system and considers that the program as designed can have positive impact on the registration
system, provided that the registration fee for initial registration o f properties i s kept nominal or
very small. The benefits of title registration have been demonstrated to be simplicity, relative
ease of automation, simple conveyancing requirements, and lower costs in the long run.
39
Appendix 4.3
Laws of Mortgageand of RealProperty inEgypt
Laws of Mortgage
1. The Civil Code establishes a general framework for real estate lending, which i s addressed
more specifically by the Real Estate Finance Law (Law No. 148 of 2001) (viz., Mortgage Law)
and its executive regulations, which govern all loans made for the purpose o f purchasing,
building, repairing or improving houses and other buildings. Only specifically identified entities
may make real estate finance loans, including banks and real estate finance companies formed
under the Mortgage Law. The Law establishes a reasonably sound legal basis for mortgage
lending, setting forth a simple and transparent mechanismfor foreclosure if the borrower defaults
on the loan. Foreclosure sale can only occur pursuant to a writ of execution from the competent
court; non-judicial enforcement procedures are not permitted. However, there have been no
foreclosures yet under the provisions of the Law.
2. The Mortgage Law Law requires the use of tripartite loan agreements among buyer, seller
and creditor. There i s some opinion that the tripartite agreement, which places the creditor in
privity of contract with the seller as well as the borrower, grew inpart out of the difficulties with
registering transfer of title to buyers and permits closing of transactions earlier than otherwise
would be the case. Similar arrangements have been noted in other countries with poorly
developedregistration systems.
3. All mortgages must be registered. The application for registration must include the loan
agreement as well as the registered deed for the real estate. As a practical matter, this means that
only registered real estate may be used as mortgage collateral. According to the Mortgage Law,
the registry must issue a final decision or request for additional information regarding a request
for registration within a week from the time the application i s made, but there are too few
mortgages made today to determine whether this requirement will be met as lending volume
increases.
4. While essentially serviceable, some provisions of the Mortgage Law have been noted b y
commentators as possible longer term issues, including:
0 The requirement for a minimumforeclosure bidprice, determined by appraisers.
0 Article 23 of the Law, which appears to say that registration o f a writ o f execution frees
the mortgagedreal estate of all liens whose holders were notified of the writ of execution
and the sales proceedings, thereby potentially subordinating the rights o f senior line
holders to junior lien holders.
5. Article 26 of the Real Estate Finance Law provides that foreclosure sale proceeds are to be
distributed to creditors according to their loan types rather than strictly according to their priority
inthe registry, suggesting that registration does not assurepriority of earlier registered liens over
later registered liens.
40
Real Property Law inEgypt, Generally
6. Egypt has a comprehensive set of laws governing ownership of real estate, real estate
transactions, real estate finance, and registration of real estate rights, as well as generally
comprehensive and adequate laws regulating agency, easements and real covenants, urban
planning, building codes, landlord-tenant relations, adverse possession (not against state land)
and real estate taxation. Several assessments of the laws, regulations and ministerial directives
pertaining to real estate rights, transactions, and registrationissues are provided in several reports
prepared by the Bank and the USAID EFS project and are included inthe Project File.
7. Real estate can be bought, sold, leased, inherited and given as security for a debt. The
owner of real estate has the exclusive right to possess, use and dispose o f it within the limits of
law. Egyptian law, both the Civil Code and Sharia, gives neighbors and occupants (lessees) very
strong pre-emptive rights (rights of first refusal) to purchase real estate before it can be sold to a
third party, though this right can be waived. The implications o f this principle of law for
registration of property transactions will have to be further investigated and addressed in the
course of the project.
8. Private property i s adequately protected against being taken b y the State, and cannot be
expropriated except for a public purpose and with payment of fair compensation. Ownership of
land typically includes all that i s on, above and under the land, but ownership o f the land and
buildingson it may be legally separated and often is. As in other countries with recent histories
of state monopoly of land ownership and divided rights to land and structures, this has led to
slow privatization of land, unresolvedlandrights and consequent title registration problems.
9. The concepts of ownership o f multi-story buildingsand apartments andjoint ownership of
common building areas are established in Egyptian law, but Egypt lacks a single law that
provides a modern, comprehensive framework for condominium ownership or strata titles.
Recent assessments by the USAID EFS project concluded that significant improvements may be
achieved through regulation and that a new law i s not necessarily required.
10. Urban planning and building laws are relatively well developed, follow standard practices
regarding land use and subdivision, and are mostly within the control o f localities. Construction
or issuance of a buildingpermit for construction on subdivided land cannot occur until the terms
and conditions of the division are fulfilled, including payment for the cost o f any utilities that
might have been required as a condition to the division. The law requires the owner to obtain a
building permit for any building or improvement to an existing building with a value that
exceeds LE 5000, but a very large number of buildings in Cairo and other cities have been
constructed or improved without necessary building permits. The Urban Planning Law
conditions registration o f rights to property on issuance of required land use and building
permits, which has consequences for the registration system. Since so much property
development occurs without the necessary formal approvals, many parcels and properties cannot
be registered and large numbers of properties and rights, particularly o f the poor, are excluded
from the registry.
41
Annex 5: Project Costs
ARAB REPUBLICOF EGYPT-MORTGAGE FINANCE PROJECT
Table 1:Project Cost by Component and/or Activity
Project Cost By Component and/or Activity Local Foreign Total
(US$M) (US$M) (US$M)
ECMR mortgage refinancingprogram' 208.1 0.0 208.1
Total Baseline Cost 208.1 0.0 208.1
Physical Contingencies 0.0 0.0 0.0
Price Contingencies 0.0 0.0 0.0
Total Project Costs2 208.1 0.0 208.1
Interest during construction 0.0 0.0 0.0
Front-end Fee 0.5 0.0 0.5
Total Financing Required 208.6 0.0 208.6
'The estimate for the size of the ECMR program o f mortgage refinancing loans represents a
base case.
2There are no identifiable taxes and duties, and the total project cost, net of taxes, i s US$208.1
million. Thus, the share of project cost net o f taxes i s 100%.
cost
Component (inc. contingencies) % of
fUS$M) Total
ECMR mortgagerefinancing program 208.1 100
I I I
TOTAL PROJECTCOST I 208.1 I 100
42
Annex 6: ImplementationArrangements
ARAB REPUBLICOF EGYPT -MORTGAGE FINANCEPROJECT
Refer to Section C.2 of the main text.
43
Annex 7: FinancialManagementandDisbursementArrangements
ARAB REPUBLICOFEGYPT-MORTGAGE FINANCEPROJECT
1.ExecutiveSummaryandConclusions
1. The project's development objective i s for primary lenders in the financial market (viz.,
both banks and non-bank lenders) to provide longer-term, market-based mortgage loan
financing for residential housing. Such financing i s largely non-existent at present, in part
because they do not have reliable access to sources of term finance on favorable terms that
could help them to mitigate the associated business and lending risks. The Egyptian Company
for Mortgage Refinancing (ECMR) will provide such a source.
2. The project will be implemented by the ECMR through a credit line to support the
company's operations until it has developed sufficiently enough for it to raise financing in the
domestic bond markets on the basis of its own financial and institutional strength. In order to
understand the overall environment for financial management (FM) arrangements, discussions
were carried out with the members of Ministry of Investment (MOI) Task Force (TF) entrusted
with the preparation of the project and the establishment of the ECMR.
3. There will be a Loan Agreement between the Bank and the Government o f Egypt (GOE)
represented by the Ministry o f International Cooperation (MOIC), and a Project Agreement
between the Bank and the ECMR. B y virtue of a Subsidiary Agreement between the GOE and
the ECMR, the GOE will on-lend the Bank loan proceeds to the ECMR which will be in charge
of implementing the project.
4. Untilthe ECMR is established, preparation responsibility will rest with the TF, chaired
by the Chairman of MFA, which over the past year has been responsible for preparing the
project. The Ministry o f Investment (MOI) has also established a Mortgage Finance Unit
(MFU)within the ministrycomprised of an Advisor to the Minister who acts as the UnitHead
and who i s assisted by a team of two specialists. Part of the unit's mandate is to coordinate and
follow up on the establishment of the ECMR. To ensure a timely and reliable launch of ECMR
operations, the legal establishment of ECMR as the Project Implementing Entity will be a
condition for board presentation.
5. As a new entity under establishment, the ECMR has no prior experience with
implementing World Bank financed projects. In addition, the fact that the ECMR is under
establishment suggests that the set up of an acceptable financial management system shall be
completed before the project can operate. An alternative was to reinforce the MFUof the MOI
with financial management staff and to prepare it to handle the project's FMfunctions. Yet the
possible complexity that may arise in the coordination between the MFU and the ECMR has
rendered this alternative less efficient. Accordingly, it has been agreed that the project's
financial management (FM) activities - including recording, budgeting, reporting, and handling
the project funds - will be handledby the accounting and treasury departmentsto be established
at the ECMR in accordance with its preliminary business plan submitted to the Bank. The
structure of the both departments has been agreed between the Bank and the TF. They will be
headed by qualified managers with relevant banking/financial sector experience who will be
44
recruited early enough in order to take the necessary measures to ensure readiness for
operations.
6. To ensure that project funds are accounted for properly, and that the ECMR become
operational prior to the release of Bank funds, the ECMR will initially depend on its raised
equity from the subscriptions of its shareholders to finance its initial establishment costs. And
later it may depend on issuingbonds to finance its operations. Meanwhile, the establishment of
a financial management system acceptable to the Bank within the ECMR will be a condition of
disbursement for the project. Such establishment would entail the following actions:
Table: 1: Requirementsfor Establishinga FinancialManagement System
[RequiredAction Reason By How Date ~~
Establish two separate The accounting department rask Through Before disbursement
accounting and treasury to be responsible for the orce, competitive
departments as indicated in project's financial hen recruitment
the preliminary business 3CM process.
plan. Each department recording, budgeting, t
should be headed by a reporting, and the loan
qualified manager with disbursement
appropriate arrangements.
bankingtfinancial sector The treasury department to
experience. be responsible for the
management of ECMR
funds, andcash flow
operations. -
Prepare the ECMR To document the project's 3CM To beprepared by Before disbursement
procedures manual policies and procedures. t ECMR with
including accounting consultant support
policies and procedures. ifneeded.
Establish accounting system To record, analyze and report on 3CM Through a short Before disbursement
inaccordance with project activities, and to generate t list, TOR and
acceptable standards and periodic reports including selection that is
using integrated MIS quarterly and annual financial agreed with the
(management information reports as required by the Bank Bank
system). and by other statutory
requirements
Hire qualified private To meet the statutory audit 3CM Through TOR and Before disbursement
auditor acceptable to the requirement and to ensure receipt < selection that is (expected at ECMR
Bank with previous banks' of timely and acceptable annual agreed with the incorporation as
audit experience. audit reports and quarterly Bank required by its charter)
reviewed financial monitoring
reports for the project -
Complete the staffing of To support successful ZCM Through TOR and Before disbursement
ECMR as per the functioning of ECMR operations < selection that i s
preliminary businessplan agreed with the
(CEO, legal, internal audit, Bank
credit, marketing,
operations, and research).
45
2. FinancialManagementRisks
Table 2: RisksandMitigationMeasures(MM)
General Risks:
The Observance o f Standards and Codes - inaccordance with acceptable
Accounting & Auditing (ROSC-AA) standards.
Report (2002) identified some weaknesses Significant - Hire an independent qualified Moderate
inthe financial reporting and auditing private audit firm with relevant
practices inEgypt. bankdfinancial sector audit
experience.
Specific Risks:
departments as indicated inthe preliminary
business plan to ensure proper internal control.
The ECMR is a new entity that Each department should be headed by a qualified
does not have any previous manager with appropriate banking/financial
experience with the sector experience.
implementation of WB- High - Prepare the procedures manual and accounting Significant
financed projects. policies and procedures.
- Bank financial management specialist (FMS)
will provide close support at the preparation
phase.
Recording and reporting may - Develop a chart of accounts that allows analysis
not allow the required linkage by source of funding (IBRD loan, ECMR capital,
between sources and uses of bond issuances) and by type o f expenditure
funds, and the separate Significant (operatiodbeneficiary PMLs, etc.) Moderate
identification of Bank funding - Policies and procedures will clarify accounting
and its use treatment and flow o f information.
- Ensure timely submission of withdrawal ~
Delays inflow of funds Significant applications.
- Pre-screen applications at CO before sending Moderate
them for disbursement at HQ.
46
- Develop annual disbursement plan that is
consistently updated.
An independent and qualified private auditor
Lack o f acceptable and timely with banklfinancial sector audit experience will
audit of financial statements Significant be hired in accordance with TOR acceptable to Moderate
the Bank.
- FMRs will be discussed and agreedbetween
the ECMR Financial Manger and the Bank FMS
Financial Monitoring reports before disbursement.
may not provide useful - The FMRs will be issued on a quarterly basis
informationthat is timely and High and reviewed by the independent auditor. Significant
accurate -The accounting software will support the above
process and integrate with ECMR's MIS.
- The software procurement and implementation
will be completed before disbursement. Significant
3. Accounting System
7. After the ECMR has been operationally established and its key financial staff recruited,
details about the accounting system will be put in place. All transactions will be recorded in
books of accounts and supporting documents will be kept at the ECMR. Funds received from
different sources will be identified separately and reflected in ECMR accounts, quarterly FMR
and annual FS.
8. Project-related transactions and activities are distinguishedat the data-capture stage. An
identifiable Trial Balance for ECMR capturing all ECMR sources of funds, expenditures, and
other payments under the project will be prepared. The Chart of Accounts should allow data to
be captured in a manner to facilitate financial reporting of ECMR accounts by type of
expenditure (asset acquisition, refinanced loans extended to PMLs, operating expense,
financing expense, etc.), by source of funding (capital, loans, bonds issuance) and by revenue
source.
4. InformationSystem
9. The Management Information System (MIS) should be capable of monitoring the
ECMR's overall operational activities including loans, credit ratings, collaterals, interest
accruals and cutoffs, repayments, etc. The ECMR will maintain its books of accounts using
computerized accounting system managed under its responsibility. It will prepare and
disseminate the financial management reports, and ensure timely transmission of these
documents. The automated accounting books will reflect, inter alia, the IBRD loan, ECMR
capital, bond issuances, the balances related to the amounts disbursed, the transactions of the
special account and the SA balance at the end o f each period. The Financial Manager will be in
47
charge of the issuance of the annual project financial statements and the quarterly Financial
Monitoring Reports (FMRs) as well as the submission of these documents on a timely basis to
the IBRD and to the auditors.
5. Flow of FundslFlow of Documents
A. Betweenthe Bankandthe ECMR:
10. To ensure that funds are readily available for project implementation, the ECMR will
open, maintain and operate a Special Account (SA). Deposits into, and payments from the SA,
will be made in accordance with the provisions stated in the loan agreement. Disbursement
under this loan will be made according to the transaction-based disbursement procedures that
include the use of Statements of Expenditures (SOEs) andor reimbursement. Withdrawal
applications and replenishments of the SA will be prepared and sent by the ECMR signed by
authorized signatories. The name and corresponding specimen of signature of authorized
signatories will be submitted to the IBRD. The project shall apply to get access to the Bank's
disbursement website (known as "Client Connection") in order to follow up on the status o f its
withdrawal applications and to timely reconcile its records with the Bank records. The place
for depositing ECMR capital will be decided by ECMR shareholders upon its establishment and
inaccordance with MFA regulations.
B. BetweenECMRandParticipatingMortgageLenders:
11. Against appropriate documentation of loans by participating mortgage lenders (PMLs),
the PMLs will apply to the ECMR for refinancing these loans. Such applications will be
reviewed in light of the ECMR's credit policy and its asset-liability management policy. Once
reviewed and approved by the ECMR, the ECMR will release funds to the applying primary
lender in accordance with the terms andconditions agreed between both parties.
6. InternalControls
12. An integral part of the internal control system is the development of a financial policies
and procedures manual. This i s crucial for ensuring transparency, providing clarity regarding
financial aspects to the various stakeholders and finance staff, ensuring uniformity, and
enforcing accountability. These policies shall ensure efficient management and deployment of
funds, proper segregation of duties, and a clear transaction approval process.
13. Ensuringthat the required staff are timely in place in a timely manner i s also a crucial
milestone for the establishment of the internal control system. This staffing exercise shall pay
due attention to the segregation of duties principle from the beginning of the project. The
financial policies and procedures manual shall outline: (a) job responsibilities within the
financial department, (b) accounting principles and policies, (c) accounting system, (d)
operational procedures (eg., for withdrawal from the Special Account, replenishment, payments
to beneficiaries, etc), and (e) the accounting cycle and entries, the chart of accounts, and
templates of forms to be used.
48
7. Reporting
14. The ECMR will be responsible for issuing monthly automated financial reports (FR),
quarterly Financial MonitoringReports (FMR) and annual Financial Statements (FS):
Table 3: Schedule for IssuingMonthly Automated FinancialReports
(i) Monthly un-audited FR. These reports will be prepared and generated from the
automated system, by the ECMR on a monthly basis. They will not be sent to the
Bank. They will be reviewed and reconciled with the monthly withdrawal
applications and quarterly FMR sent to the Bank. The Bank will follow up during
supervision missions. The format of the reports should be quite simple (a trial
balance listing all sources and uses of funds and bank reconciliation).
(ii)produced
Ouarterly reviewed FMR. The format and content of the FMR, which will be
within 3 weeks from each quarter closing date will be included in the
financial management manual. There should also be an introductory narrative
discussion of the project's developments and progress duringthe quarter.
(iii) Annually audited FS. The FS should be ready within 3 months from the end of
fiscal year to enable the submission of the audit report within 6 months after the
closing date of the fiscal year. The FS should include: (i)a balance sheet, income
statement, cash flow statement and statement of changes in equity (ii)statement o f
sources and uses o f funds indicating funds received from various sources, as well as
project expenditures; (iii)a SA reconciliation statement and (iv) detailed statement of
withdrawals made on the basis of SOEs.
8. Attestation Arrangements
15. TheECMR will be subject to two types of attestation engagements as follows:
A. Annual Audit: Annual audits for the ECMR will be conducted by independent auditors
satisfactory to the Bank with appropriate banking and financial sector experience. The
audit will be performed for ECMR as a whole (Le., all assets, liabilities, equity,
expenditures and revenues) with separate identification and reporting of the IBRD loan
and its use. The audit report, accompanied by a management letter, will cover the
ECMR's financial statements, reconciliation and use of the SA, and withdrawals based
on SOEs. The report should be submitted by ECMR to the Bank no later than six
months following the closing of the fiscal year subject of the audit. The external audit
report should be in accordance with the Bank auditingrequirements/TOR and conducted
49
according to International Standards on Auditing (ISA). The ECMR i s already required
to have its financial statement audited within 3 months following the end of its financial
year in accordance with the Egyptian statutory requirements (Company Law No. 159).
B. Quarterly Reviews: The same auditor will also be involved in conducting quarterly
reviews of the project's FMRs within 45 days from the end of each calendar quarter.
Withdrawals from the loan, whether in the form of SOEs or reimbursement, that are
included inFMRswill be part of the scope of these quarterly reviews.
Table 4: Attestation Schedules
end of quarter Auditor
FS 6 months from External World Bank English Audit
endof FY Auditor
9. Readinessfor Implementation
16. The ECMR will have to be incorporated prior to the project presentation to the Bank
Board. The development of the financial management system for the ECMR will be a condition
for loan disbursement. To ensure timely fulfillment of the above disbursement condition, the
Bank FMS will work closely with the M O ITask Force and then with the ECMR.
10. Supervision Plan
17. The Bank FMS will participate in the supervision process. At least two supervision
missions for the project will be carried out annually in addition to follow up visits as deemed
necessary. The F M R s for the Project will be reviewed on a regular basis by the FMS and the
results or issues will be followed up during the supervision missions. Financial audit reports
and management letters will be reviewed by the Bank FMS who will follow up on issues
identified. Also, during the Bank's supervision missions, the Project's financial management
and disbursement arrangements (including a review of a sample of SOEs and movements on the
Special Account) will be reviewed to ensure compliance with the Bank's requirements and to
develop the financial managementrating to the Implementation Status Report (ISR).
11. Disbursement Arrangements
18. The proceeds of the Loan would be disbursedin accordance with the transaction based
disbursement procedures of the Bank through the use of Statements of Expenditures (SOEs)
andor reimbursements in accordance with the procedures described in the Disbursement Letter
and the Bank's "DisbursementManual". Withdrawal applications will be prepared and sent by
the ECMR signed by authorized signatories. The name and corresponding specimen of
signature of each of the authorized signatories will be submitted to the World Bank. The
ECMR, as the Project ImplementingEntity, will be responsible for submitting the appropriate
supporting documentation for activities implemented so that payments can be made from the
50
Special Account opened for that purpose. As projected by the Bank's standard disbursement
profiles, disbursements would be completed four (4) months after Project closure.
19. Allocation of loan proceeds: The allocation of loan proceeds by disbursement category
and percentage to be financed i s shown in the table below:
Table 5: Allocation of Loan Proceeds by Disbursement Category
CATEGORY % of Expenditures to be
20. Use o f Statements of Expenditures (SOEs): Documentation supporting expenditures
claimed against SOEs will be retained by the ECMR and will be available for review when
requested by Bank supervision missions and Project Auditors. All disbursements will be subject
to the conditions of the Loan Agreement and the procedures defined in the Disbursement Letter.
21. Special Account (SA): To facilitate disbursement of eligible expenditures the ECMR
will open and establish at a commercial bank a Special Account in Egyptian Pounds to cover
Loan's share o f eligible Project expenditures. The Authorized allocation of the S A would be the
equivalent of an estimated four (4) months of eligible expenditures financed by the Loan. The
ECMR will be responsible for submitting monthly replenishment Withdrawal Applications
(WAS)with appropriate supporting documentation for expenditures incurred and will retain and
make the documents available for review by the Bank supervision mission and project auditors.
The supporting documentation will include reconciled SA bank statements and other documents
as may be required.
22. Retroactive Financing: There i s no retroactive financing.
51
Annex 8: ProcurementArrangements
ARAB REPUBLICOFEGYPT-MORTGAGEFINANCEPROJECT
1. No procurement of goods or services under the Bank loan is anticipated. This, the
overall project risk for procurement i s negligible or low.
2. Procurement o f the housing civil works, goods and equipment underlying the mortgages
will be undertaken by the beneficiary households in accordance with established local private
sector and commercial practices which are acceptable to the Bank.
52
Annex 9: Economic and Financial Analysis
ARAB REPUBLICOF EGYPT-MORTGAGE FINANCE PROJECT
A. Financial Analysis of the Egyptian Company for MortgageRefinancing
Introduction
1. There are a number of factors that will affect the viability and performance of the
ECMR. General factors include the level and volatility of interest rates in the economy that
influence the size and growth of the mortgage market in general and the pace of improvement
in the property registration and legal system which in large part determine the cost and credit
risk of mortgage lending. The types of mortgage instruments offered by lenders will affect the
volume of borrowing from the ECMR. If adjustable rate mortgages (ARMs) are allowed, the
mortgage market i s likely to grow faster but banks may see less need to use the ECMR for risk
management purposes as ARMs facilitate better matching with deposit liabilities. Conversely, a
continued prohibition of ARMs will result in a smaller, fixed rate mortgage (FRM)-based
mortgage market but greater use of the ECMR as a vehicle to access longer term funding. The
characteristics of the major mortgage lenders will also influence the ECMR's performance. If
banks emerge as the main mortgage lenders, they may not see a needto borrow from the ECMR
iftheir current relativelyhighlevelsofliquidityaremaintainedandARMs areallowed. The
RELCs are more likely to use the ECMR for funding than banks. If they emerge as major
lenders the ECMR's volume of business will grow.
2. The development of the Egyptian bond market may also influence the growth of the
ECMR. To be successful the ECMR must be able to issue relatively long maturity debt which i s
currently scarce in Egypt. The growth of institutional investors seeking longer duration assets
will be helpful for the ECMR's business.
3. The ECMR's strategy will also affect its volume of business. The spread that it adds to
its funding cost will determine the rate at which it lends. A major component in the spread i s
the targeted return on equity (ROE) of its shareholders and time given to reach targets. If the
shareholders demand an after-tax market return on their investment (e.g., 15%), the ECMR will
have to add approximately 100 basis points to its lending rate. Alternatively, the shareholders
may be more comfortable with a lower return and concomitant lower rate on their loans. All
other things equal, a lower lending rate will induce a higher volume o f lending allowing the
ECMR to amortize its fixed costs over a larger base thus requiringa smaller administrative cost
component to its margin." Reaching an acceptable level of profitability also requires a modest
level of initial capital to start in order to safely leverage as much refinancing activities. Another
factor to be considered i s that a relatively long period should be assumed by the founding
shareholders before the ECMR reaches a steady state regime and an acceptable ROE, through
an accrued volume of refinancing activities, well managed risks, and a market acceptance o f its
securities without state guarantees.
"Forexample, theCRHinFranceaddsnospreadtoitsfundingcosts. Itsownerspreferthelowerratesonloans
to a return on their investment. The CRH operates with virtually no credit or interest rate risk and covers its very
low administrative costs with the return on its investment portfolio.
53
PricingAssumptions
4. There are few mortgages being originated in Egypt - the rates as of early 2005 were 11-
14% percent for 10 year FRMs with 2-3% prepayment penalty. The average deposit rate over
the 12 months ending April 2005 was 7.7% percent. The average inter-bank rate was 8.8% and
the average commercial bank lending rate was 13.4%. Inflation i s forecast at 6% in 2005 falling
to 5% in 2006 [MI.
FundingBenchmarks
5. The GOE yield curve will serve as a risk-free benchmark for ECMR term debt. Initially,
the ECMR i s likely to issue medium term debt priced off 3 and 5 year maturities. Shorter
maturity debt (1-3 years) with lower expected yields may also be issuedby the ECMR.
FundingCost
6. The market-based fundingcost for the ECMR is difficult to predict because there are no
direct analogues in existence. If the Government provided an explicit guarantee, the yields on
ECMR debt would be comparable to that of similar maturity government debt. However, since
no explicit guarantee i s planned, the yields will be somewhat higher, for example around 25-50
basis points at the start -reflecting a perceived (small) higher credit risk and less liquidity than
government debt. Strong support evidenced by CBE initial investment and the joint regulation
by three regulators (MFA, CBE & CMA) will eventually increase investors confidence
contributing to a lower spread than private corporate issues.
7. It is important to note that the ECMR funding cost and its lending rates will be higher
than bank deposit rates in almost all circumstances. The attraction of the ECMR i s that it
provides funds on longer terms than deposits (which are typically 3 to 6 months in maturity),
with immediate access (assuming the availability o f collateral) and with very low transactions
cost. In addition, it can provide fundingterms (e.g., variable rates, amortizing loans) that are not
available in the deposit market, thus helping PMLs develop new loan products and effectively
manage liquidity and interest rate risks.
Margin
8. The ECMR will price its loans as a spread to its fundingcosts. The ECMR's margin will
reflect its administrative costs, costs of bond issuance, risk, profit margin and taxes. The ECMR
administrative cost margin will be low reflecting the simplicity of its operation. Major mature
international liquidity facilities operate with administrative costs of 10 basis points or less.
Initially, the ECMR may charge a higher administrative cost margin (e.g., 15-20 basis points)
reflecting the relatively high proportion of fixed costs such as rent, computers, various start up
costs and fees, etc. Major variable costs include bond issuance fees, and salaries. It will be
critically important to control costs during the inception phase characterized by a small initial
asset volume, and the necessity to accrue a sizeable refinanced portfolio. ECMR's margin on
the overall will not exceed 75 basis points which i s really a compressed minimumlevel to start
operations.
RiskPremium
9. The ECMR's risk premiumwill dependon the magnitudeof the various financial risks it
must manage but should be low reflecting its low risk structure. The main credit risk will be
54
that of a PML failure which i s reduced through the pledging o f collateral to secure the ECMR's
loan and active monitoring of P M L financial and collateral performance. The pledge i s further
strengthened through over-collateralization (and a collateral maintenance agreement with the
borrower). The stronger the legal status of the lien on the collateral (e.g., against bankruptcy of
the borrower) the lower the risk and spread.
10. The ECMR may be exposed to considerable interest rate risk in a fixed rate lending
environment. The ECMR will match its loan characteristics with its funding characteristics thus
minimizing its potential interest rate risk. Initially, the ECMR loans and bonds will be non-
amortizing, non-callable and duration matched, easing its ability to match fund. More complex
debt instruments will be introducedinthe future as the bond market matures and the ECMR can
manage this risk. A reasonable initial risk premium i s 25-30 basis points.
ProfitandTaxes
11- The final spread component covers the ECMR's target profit and taxes. A major
component in the spread is the targeted return on equity (ROE) of its shareholders. The
ECMR's pricing strategy will also affect its volume of business. If the shareholders demand an
after-tax market return on their investment (e.g., 18.75%), the ECMR will have to add
approximately 75 basis points to its lending rate, assuming 4% equity-to-asset ratio.
Alternatively, the shareholders may be more comfortable with a lower after-tax return (e.g.,
6.25%) and associated lower rate on their loans (e.g., a profit spread of 25 bp).12 All other
things equal, a lower lendingrate will induce a higher volume of lending allowing the ECMR to
amortize its fixed costs over a `larger base thus requiring a smaller administrative cost
component to its margin. A 40 bp profit spread corresponds to 10% target after-tax ROE for
first 5 years will help to establish the ECMR.
12. Reaching an acceptable level of profitability also requires a modest level of initial capital
to start in order to safely leverage as much refinancing activities. Another factor to be
considered is that a relatively long period should be assumed by the founding shareholders
before the ECMR reaches a steady state regime and an acceptable ROE, through an accrued
volume of refinancing activities, well managed risks, and a market acceptance of its securities
without state guarantees.
IllustrativePricing
13. Table 1 below shows a range of possible ECMR pricing (based on short and medium
term GOE bond yields), loan rates and mortgage rates. The ECMR's narrow spread reflects its
low cost and low risk operation.
ProjectedPerformance
14. , MarketVolume: The mortgage market volume is difficult to forecast as it depends on a
number of factors discussed above. Appendix (1) summarizes the projectedperformance o f the
l2For example, the CRHinFrance adds no spreadto its funding costs. Its owners prefer the lower rateson loans to
a return on their investment. The CRH operates with virtually no credit or interest rate risk and covers its very low
administrative costs with the return on its investments.
55
15. ECMR under two scenarios: relatively strong growth and slow growth. The ECMR is
assumed to start business at the beginning of 2007. The strong growth scenario assumes that
interest rates continue to fall, both banks and RELCs use the ECMR and its bonds achieve near
government yield levels. The slow growth scenario can occur in different ways - higher
interest rates and slower progress on property registration reform will reduce the size and
growth of the mortgage market.
Component Rate
Mortgage Rate 11.50-13.50%
Lender Spread 1.50-3.00%
ECMRAdministrative Costs 0.15%-0.20%
RiskPremium 0.25%-0.40%
ECMRLoanRate 10.00-10.5%
Profit and Tax Margin 0.25%-0.40%
ECMR FundingCosts 9-9.5%
16. Rates and Terms: The performance of the ECMR will depend on the rates and terms on
its bonds, loans and the macroeconomic environment (inflation, and interest rates) in which it
operates and its volume of business. Table 2 summarizes the inflation and interest rate
assumptions o f the forecast scenarios. The ECMR's funding costs are assumed to be 50 basis
points over the forecast medium term government debt rate, falling to 30 bp by the end of the
high growth forecast period. The lending rate is assumed to be a spread of 75 basis points
falling to 50 basis points over the first 4 years. Interestrates are assumedto remain constant.
17. Market Share: Critical factors are assumptions regarding the size o f the market and
percentage of the market funded by ECMR. It is assumed that the ECMR finances a significant
share of the market in both scenarios reflecting its favorable cost of long term funds and
growing demand for mortgages.
Table 2: Scenario Assumptions: Base Case Scenario
Assumptions (Forecast Time Frame 2007 2011) -
Base Case
Interest Rates rates remain flat: Mortgage 12.5%, Bond 9.5%
Market Size LE3.0 billion
.ECMR Market Share 40%
Debt Spread 50 bp
Loan Spread 75 bp
18. Base Case scenario: In the base case scenario, the ECMR i s modestly profitable during
its first 5 years. The ECMR provides a projected LE 1.2 billion of PML refinancing during its
first 5 years. It has a relatively high market share, reflecting an implicit assumption that the
market remains primarily if not exclusively fixed rate. The low volume assumption results in a
relatively high ratio of expenses to assets of 34 basis points by year 5 and a modest ROE
(9.33% in year 5 reflecting a relatively high capitalization). The scenario assumes that 20% of
56
after-tax net profits are paid as dividends or profit sharing. This scenario assumes no change in
the ECMR loan or bond spreads. Even in this scenario there i s room to modestly reduce the
loan spread (andincrease volume) without endangering the solvency of the institution.
19. Fast Growth Scenario: Inthe fast growth scenario the ECMR provides a projected LE
2.4 billion in refinancing duringits first 5 years and does not yet need any recapitalization. The
ROA falls in later years reflecting a 25 bp reduction in its loan spread. The ROE rises steadily
during the scenario, reaching 10.86% in the fifth year even with the spread falling to 50 basis
points. Again 20% of profits are paid as dividends or profit sharing. If the loan spread i s not
reduced, the ROE rises to 15.02%. Conversely, the ECMR could reduce the spread faster and
by a greater amount, most likely increasing the volume of activity if the economic environment
remains strong.
Table 3: Base Case Scenario:
(LE`000)
*Paid incapitalLE200,000; 20% dividendpayout
B. Economic Analysis
20. The commercial viability of the ECMR, as indicated above inthe financial analysis, does
not by itself ensure that the ECMR will generate net economic and social benefits. However, at
a minimum, economic benefits are expected to accrue to: (a) mortgagors (households), from a
combination of lower costs of funds and a longer term on the mortgages being offered, as well
as from greater interest in lenders to pursue housing finance lending; (b) lenders, from a
reduction inthe risks associated with longer-term housing loans, thereby enabling a reduction in
the price and non-price barriers to longer-term borrowing; (c) the capital market, from
improved information on term structures and risks that should reduce the cost of issuing
medium- and long-term debt inEgypt. These benefits have not been quantified. Theoretically,
they may be susceptible to quantification, but the resulting estimations would only be
indicative.
57
21. Other benefits of the ECMR are also likely to accrue. The ECMR could induce greater
public awareness of the importance of analyzing credit risks in the absence of government
guarantees, and also help to strengthen the foundation for any efforts by the Government to
reform its housing and housingfinance subsidy schemes.
22. Implicit in this analysis i s the counterfactual assumption that the housing finance market
in Egypt would remain unchanged in the absence of the ECMR. To the extent that other
adjustments could take place without the ECMR, the potential economic benefits of the project
would be reduced. However, it i s difficult to discern signs that the basic nature of the mortgage
finance market would change anytime soon in the absence of this project. It i s considered
unlikely that a purely private sector entity would undertake to provide similar services
independently, both because the external benefits cannot be captured entirely by a totally
private sector entity, and also because the major financial institutions inEgypt could reasonably
view such an entity as undermining their competitive positions within the financial sector and
therefore oppose it. Throughout the world, virtually all modern mortgage finance systems have
required government support to emerge.
58
Table 4 (a):ECMR Base Case Financial Projections
Balance Sheet
(LEthousands)
Benchmark Spread
4ssets 8.0000%
Current assets
Cash 0.000% 3,000 3,700 4,800 5,200 6,000
MF-Loans 10.250% 125,000 305,000 605,000 800,000 1,200,000
Placements & Gov.securities 8.0000% 89,000 99,500 72,000 42,500 41.000
Total current assets 217,000 408,200 681,800 847,700 1,247,000
GrossFixed assets (at cost)
Land and buildings 2,000 2,000 2,000 2,000 2,000
Furniture and fixtures 500 525 551 579 608
Computers & Software 1,000 1,100 1,210 1,331 1,464
Vehicles 500 550 605 666 732
Total gross fixed assets
" 4,000 4,175 4,366 4,575 4,804
Less: Accumulated depreciation 633 682 735 459 489
Net fixed assets 3,367 3,493 3,632 4,116 4.3 15
Liabilitiesand Stockholders'Equity
Current liabilities
Accounts payable 130 145 162 181 203
MOF Loan @ 8.5% INT. 8.5000% 10,000 50,000 100,000 166,000
WB Loan Q 9% INT. 9.0000% 10,000 80,000 150,000 200,000 214,000
Other 7.0000% 78 382 458 766 1,144
10,208 90,527 200,620 300,947 381,347
Long-termbonds 9.50% 100,000 250,000 300,000 600,000
Total liabilities 10,208 190,527 450,620 600,947 981,347
Stockholders' equity
Common stock 8.0000%
Paid-in capital 200,000 200,000 200,000 200,000 200,000
Legal Reserve 635 728 898 1,060 1,260
Retained earnings 0.0000% 9,524 20,440 33,913 49,809 68,707
0 0 0 0 (0
Tax Rate 20% 20% 20% 20% 20%
Common Shares Outstanding (in000s) 100,000 100,000 100,000 100,000 100,000
59
Table 4 (b): ECMR Base Case Financial Projections
Income Statement
(LEthousands)
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue (interest Income) 19,933 39,223 67,773 85,400 126,280
Interest expense (long term debt) 9,500 23,750 28,500 57,000
Interest Expense 905 8,077 17,782 26,554 33,530
Net Interest Income 19,027 21,646 26,240 30,346 35,750
Less: Operating Expenses
General and administrative 2,400 2,640 2,904 3,194 3,514
Lease expenses 120 132 145 200 250
Depreciation expense 633 682 735 459 489
Total operating expenses 3,153 3,454 3,784 3,854 4,253
Net profits before taxes 15,874 18,192 22,457 26,493 31,497
Less: Taxes 3,175 3,638 4,49 1 5,299 6,299
21,194 - 25,197
ExpenseIAssets 1.43% 0.84% 0.55% 0.45% 0.34%
Liquidity Analysisand Ratios
Net Working Capital ,206,793 317,673 481,180 546,753 865,653
Current Ratio 21 5 3 3 3
Activity Ratios
Fixed Asset Turnover 6 11 19 21 29
DebtRatios
Debt Ratio 0.05 0.46 0.66 0.71 0.78
Debt-equity Ratio 0.05 0.81 1.70 1.99 3.07
ProfitabilityRatios
Gross Profit Margin 95% 55% 39% 36% 28%
OperatingProfit Margin 79.637% 5.38% 33.135% 31.022% 2, 942%
Net Profit Margin 63.710% 37.11% 26.508% 24.818% 19.954%
Return on Assets (ROA) 5.763% 3.535% 2.621% 2.488% 2.014%
Return on Equity (ROE) 6.04% 6.58% 7.65% 8.45% 9.33%
Earnings Per Share (EPS) 0.13 0.15 0.18 0.21 0.25
CapitaUAssets 95.37% 53.72% 34.26% 29.45% 21.57%
60
Annex 10: SafeguardPolicyIssues
ARAB REPUBLICOFEGYPT-MORTGAGEFINANCEPROJECT
Not applicable
61
Annex 11:ProjectPreparationand Supervision
ARAB REPUBLICOFEGYPT-MORTGAGE FINANCE PROJECT
Table 1:ProjectManagementSchedule
Planned Actual
PCNreview February 10, 2005
Initial PID to PIC March 8, 2005
Initial ISDS to PIC March8,2005
Appraisal May 9,2006
Negotiations May 17,2006
Board approval June 27,2006
Planned date of effectiveness October 16,2006
Planned date o f mid-term review March 1,2009
Planned closing date July 31,2011
1. Key institutions responsible for preparation of the project: Ministry of Investment,
Ministry of Justice, andMinistry of State for Administrative Development, with the assistance
of the World Bank
2. Bank staff and consultants who worked on the project include those listed in Table 2.
Table: 2: ProjectTeam
Name Title Unit
Robert Buckley Advisor, Urban Housing (Peer Reviewer) TUDUR
Stephen Butler Property RightsRegistration Consultant M N S I F
LoYc Chiquier LeadFinancial Officer and Leader of World OPD
Bank Housing Finance Network
Lawrence Hannah Lead Economist (Peer Reviewer) INFVP
Deane Jordan Lead Operations Officer (Task Team Leader) MNSIF
Mohamed Yehia Abd ElKarim Financial Management Specialist MNAFM
Hassine Hedda Financial Analyst LOAG2
Chikako Matsumoto Sr. Financial Officer SRFCF
Sydnella Kpundeh Program Assistant M N S I F
Michael Lea Mortgage Finance Consultant MNSIF
Steve Wan Yan Lun Senior Program Assistant MNSIF
Sahar Nasr Senior Financial Economist (Task Manager) MNSIF
Abdulgabbar Hasan Al-Qattab Procurement Specialist MNAPR
Ghada Youness Senior Counsel LEGMS
Amira Fouad Zaky Team Assistant MNC03
Willem Zijp Manager, Portfolio and Operations (Quality ECCU8
Enhancement Reviewer)
Bank funds expended to date on project preparation:
1. Bank resources: About $400,000
62
2. Trust funds: Nil
3. Total: About $400,000
EstimatedApproval and Supervisioncosts:
1. Remainingcosts to approval: $15,000
2. Estimatedannual supervisioncost: $85,000
63
Annex 12: Documentsinthe ProjectFile
ARAB REPUBLICOFEGYPT-MORTGAGEFINANCEPROJECT
Documents in the Project File includethe following:
0 Documents specific to the ECMR:
o Joint Stock Charter
o Regulatory prudential package approved by the CBE
o Initial Business Plan and FinanciaIProjections
o OfferingMemorandum to Potential Investors
World Bank Documents:
o Aide Memoires of project identification, preparation and pre-appraisal missions
o Note on recommendations to help facilitate the registration of property titles in
the new urban communities
o Assessments of property rights registrationinurban areas
64
Annex 13: Statementof Loansand Credits
ARAB REPUBLICOFEGYPT -MORTGAGEFINANCEPROJECT
Difference between
expected andactual
Original Amount inUS$Millions disbursements
Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm.Rev'd
PO82952 2005 EG-Earlv ChildhoodEducation 20.00 0.00 0.00 0.00 0.00 19.90 0.57 0.00
Enhancement
PO73977 2005 IntegratedIrrig Improv.& Mgmt. 120.00 0.00 0.00 0.00 0.00 120.00 1.67 0.00
PO82914 2004 EG-AIRPORTS DEVELOPMENT 335.00 0.00 0.00 0.00 0.00 289.61 25.73 0.00
PROJECT
PO49702 2004 EG-SKILLS DEVELOPMENT 5.50 0.00 0.00 0.00 0.00 5.41 2.31 0.00
PO56236 2002 EG-HIGHER EDUCATION 50.00 0.00 0.00 0.00 0.00 32.67 21.50 -1.80
ENHANCEMENT PROG
PO45499 2000 EgyptNATIONALDRAINAGE I1 50.00 0.00 0.00 0.00 0.00 25.28 17.28 0.00
PO41410 1999 Egypt P. S. REHAB I11 120.00 0.00 0.00 0.00 20.00 40.78 60.78 0.00
PO40858 1999 EG - SOHAG RuralDev , 0.00 25.00 0.00 0.00 0.00 8.22 6.53 1.40
PO52705 1999 EG-SOCIAL FUND111 0.00 50.00 0.00 0.00 0.00 0.11 -3.82 -3.63
PO50484 1999 EG SecondaryEducationEnhancementProj 0.00 50.00 0.00 0.00 0.00 31.08 20.76 27.11
PO49166 1998 EG East Delta Ag. Serv. 0.00 15.00 0.00 0.00 0.00 9.29 8.30 3.33
PO45175 1998 EG-HEALTH SECTOR 0.00 90.00 0.00 0.00 0.00 50.15 43.83 -8.29
PO05169 1997 EG-ED.ENHANCEMENT PROG. 0.00 75.00 0.00 0.00 0.00 12.35 15.66 2.10
PO05173 1995 EG IrrigationImprovement 26.70 53.30 0.00 0.00 0.00 6.95 13.18 3.33
Total: 727.20 358.30 0.00 0.00 20.00 651.80 234.28 23.55
STATEMENT OF IFC's
HeldandDisbursedPortfolio
InMillionsof USDollars
Committed Disbursed
IFC IFC
FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.
1996 ANSDK 1.33 0.00 0.00 0.00 0.56 0.00 0.00 0.00
2004 Alexandria Fiber 8.00 0.00 0.00 0.00 4.00 0.00 0.00 0.00
2001 Amreya 5.26 0.00 0.00 0.00 5.26 0.00 0.00 0.00
1999 CIL 0.00 0.74 0.00 0.00 0.00 0.74 0.00 0.00
2004 CIL 0.00 0.15 0.00 0.00 0.00 0.15 0.00 0.00
1992 CarbonBlack-EGT 0.00 1.48 0.00 0.00 0.00 1.48 0.00 0.00
1997 CarbonBlack-EGT 0.00 1.48 0.00 0.00 0.00 1.48 0.00 0.00
1998 CarbonBlack-EGT 5.25 0.00 0.00 0.00 5.25 0.00 0.00 0.00
2000 CarbonBlack-EGT 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
2002 Ceramica AI-Amir 3.75 0.00 0.00 0.00 3.75 0.00 0.00 0.00
2001 EFG Hermes 3.10 0.00 0.00 0.00 3.10 0.00 0.00 0.00
2004 EHF 0.00 1.70 0.00 0.00 0.00 1.70 0.00 0.00
2005 EgyptFactors 0.00 3.00 0.00 0.00 0.00 0.00 0.00 0.00
65
2001 IT Worx 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00
2004 Lecico Egypt 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
1986 Meleiha Oil 0.00 8.62 0.00 0.00 0.00 0.00 0.00 0.00
1988 Meleiha Oil 0.00 9.20 0.00 0.00 0.00 0.00 0.00 0.00
1992 Meleiha Oil 0.00 13.00 0.00 0.00 0.00 0.00 0.00 0.00
2004 Merlon Egypt 25.00 0.00 5.00 0.00 25.00 0.00 5.00 0.00
2005 Merlon Egypt 1.oo 0.00 0.00 0.00 0.00 0.00 0.00 0.00
2002 Metro 13.50 0.00 0.00 0.00 13.50 0.00 0.00 0.00
1992 MisrCompressor 9.70 0.00 0.00 0.00 9.70 0.00 0.00 0.00
1996 Orix Leasing EGT 0.00 0.53 0.00 0.00 0.00 0.53 0.00 0.00
2001 Orix LeasingEGT 1.36 0.00 0.00 0.00 1.36 0.00 0.00 0.00
2001 Port Said 42.52 0.00 0.00 39.88 42.52 0.00 0.00 39.88
2002 SEKEM 4.78 0.00 0.00 0.00 4.78 0.00 0.00 0.00
2004 SPDC 20.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00
2001 SUEZ GULF 41.92 0.00 0.00 136.78 41.92 0.00 0.00 136.78
1997 UNI 2.74 0.00 0.00 0.00 2.74 0.00 0.00 0.00
2001 UNI 2.44 0.00 0.00 0.00 2.44 0.00 0.00 0.00
2005 Wadi Group 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Totalportfolio: 226.65 41.90 5.00 276.66 185.88 8.08 5.00 276.66
Approvals PendingCommitment
FY Approval Company Loan Equity Quasi Partic
2004 ACB Acrylic 0.00 0.00 0.00 0.00
2000 ACB ExpansnI11 0.00 0.00 0.00 0.00
2004 Merlon Egypt 0.00 0.00 0.00 0.02
Totalpendingcommitment: 0.00 0.00 0.00 0.02
66
Annex 14: Country at a Glance
ARAB REPUBLICOFEGYPT-MORTGAGEFINANCEPROJECT
M . East Lower-
POVERTY and SOCIAL & North middle-
Egypt Afrlca income Development diamond*
2004
Population, mid-par (millions) 68.7 294 2,430
GNIpercapita (Atlas method, US$) 1,310 2,000 1,580 Lifeexpectancy
GNI(Atlas method, US$ billions) 90.0 589 3,647 T
Average annual growth, 1998-04
Population (4 1.8 18 1.0
Labor force (%) 3.0 -1.3 0.7 GNI Gross
primary
Most recent estimate (latest year available, 1998-04) captta enrollment
Poverty (%of population belownationalpovertyline) l7
Urbanpopulation (%oftotalpopulation) 42 56 49
Lifeexpectancyat birth (years) 69 68 70
Infantmortality (per 1,000livebirths) 33 45 33
Child malnutrition (%ofchildren under5) 9 11 Access to improved water source
Access to an improvedwatersource (%ofpopulation) 98 88 81
Literacy(Sbofpopulationage Et) 69 90
Gross primaryenrollment (%of school-age population) 97 100 114 L- Egypt,ArabRep.
Male 100 x)4 15 Lover-middle-income group
Female 95 94 113
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
1984 1994 2003 2004 Economlc ratios*
GDP (US$ billions) 30.6 519 82.4 75.1
Gross capitalfonation/GDP 27.5 16.6 57.1 l7.0
Exportsof goods and serviceslGDP 22.4 22.9 217 25.5 Trade
Gross domestic savingslGDP 14.0 11.4 15.2 14.8
Gross national savingslGDP .. 19.0 21.2 20.7 T
Current account balancelGDP -82 0.8 2.3 2.8
Interestpayments1GDP Domestic Capttai
, 2.7 2.2 0.8 0.8
Total debt/GDP 105.1 62.7 38.1 41.5 savings formation
Total debt service/exports 21.4 14.6 12.8 9.4
Presentvalue of debt/GDP 34.1
Present value of debVexports t30.1 Indebtedness
1984-94 1994-04 2003 2004 2004-08
(average annualgrowth) -
GDP 3.9 4.6 3.2 4.3 5.3 Egypt,Arab Rep.
GDP percapita 1.6 2.7 14 2.5 3.7 Lover-middle-income group
c
STRUCTURE of the ECONOMY
1984 1994 2003 2004
(%of GDP) Growth of capital and GDP ( O h )
Agriculture 20.1 16.9 16.1 5.5 30
Industry 29.3 32.8 34.0 32.1 20
Manufacturing t32 i7.2 18.9 182 10
Services 50.7 50.4 49.8 52.4
- -
0
Household finalconsumption expenditure 67.9 78.3 72.2 75.2 -10
Generalgov't final consumption expenditure 18.0 10.3 P.5 10.0
Imports of goods and services 35.8 28.1 23.6 27.7 ---GCF -GDP
1984-94 lgg4-04 *Oo3
(average annualgrowth) Growth of exports and imports ( O h )
Agriculture 2.7 3.3 2.8 20
Industry 4.3 4.8 1.9 "
Manufacturing 10
4.9 7.5
Services 3.8 5.0 4.1 0
-
Household final consumption expenditure 4.2 3.7 0.4 .10
Generalgov't finalconsumption expenditure -12 3.2 2.9 .. -20
Gross capitalformation -5.7 5.5 -1.7 1.5
Imports of goods and services -1.4 0.2 02 11 -Exports -0-lrrports
d
67
Egypt, Arab Rep.
PRICES and GOVERNMENT FINANCE
1984 1994 2003 2004
Domestic prices
(%change)
Consumer prices 9.0
implicit GDP deflator 112 7.1 3.6 6.9
Government finance
(%of GDP, includes current grants)
Current revenue 23.4 26.2 20.3 20.6
Current budget balance -14 4 1.9 -2.5 -3.1
Overallsurplus/deficit -22.6 -2.1 -6.2 -6.7 -GDPdeflator +CPI
TRADE
1984 1994 2003 2004
(US$millions) Export and Import levels (US$ mill.)
Total exports (fob) 3,337 8205 8247 20.000
Cotton 1,772 3,195 2,785
Otheragriculture 64 199 201 15,000
Manufactures l,P7 2,952 3,320
Total imports (cif) 10,647 14,821 15,038 10,000
Food 1,962 1,521 1,647
Fuelandenergy 542 2,373 2,232 5.000
Capitalgoods 2,349 3,n9 2,869 0
Exportprice index(2000=WO) 92 98 99 00 01 02 03 04
Import price index(2000=WO) 109 rnExports Imports
Terms of trade (2OOO=WO) 65
BALANCE of PAYMENTS
1984 1994 2003 2004
(US$millions) Current account balance t o GDP (%)
Exports of goods and sewices 6,646 10,618 18,005 18,402
Imports of goods andsewices P,267 14,332 19,566 20,031 4 T
Resource balance -5,440 -3,514 -1,562 -1,629
Net income -1.021 -P2 -936 365
Net currenttransfers 4,046 4,363 3,924
Current account balance -2,504 4 0 1,663 2,P9
Financingitems (net) 2,106 1,696 -I221 -2,183
Changesinnet resewes 398 -2,106 -662 54
Memo:
Reserves includinggold (US$ millions)
Conversion rate (DEC, local/US$) 0.9 3.4 5.0 6.2
EXTERNAL DEBT and RESOURCE FLOWS
1984 1994 2003 2004
(US$millions) :omposition of 2004 debt (US$ mxc
Total debt outstanding anddisbursed 32,203 32,523 31,383 31,155
IBRD 720 1,411 539 503
IDA 744 961 1,386 1,465 0:3.802 A:503 B:1,465
Total debt sewice 2,422 2226 2,763 2,182
IBRD 109 306 0 1 99
IDA 6 19 47 50
Composition of net resourceflows
Official grants 550 1,192 552
Official creditors 1,741 560 -770 -666
Private creditors 546 -264 -635 -226
Foreigndirect investment (net inflows) 729 1256 237
Portfolio equity(net inflows) 0 0 37 E:22,365
WorldBankprogram
Commitments 4 P 1 1B 670
Disbursements 307 199 62 100 \ -IBRD E- Bilateral
I-IDA D-Otkrmltilateral F-Private
Principalrepayments 44 204 114 116 ;-IMF G Short-ter
-
68
IBRD 33400
ARAB REPUBLIC OF EGYPT
SELECTED CITIES AND TOWNS
GOVERNORATE CAPITALS
ARAB REPUBLIC NATIONAL CAPITAL GOVERNORATES IN NILE DELTA:
OF EGYPT RIVERS 1 KAFR EL SHEIKH 7 DAGAHLIYA
2 DAMIETTA 8 MENOUFIYA
MAIN ROADS 3 PORT SAID 9 SHARGIYAH
4 ALEXANDRIA 10 QALIUBIYA
RAILROADS 5 BEHEIRA 11 ISMAILIA
6 GHARBIYA 12 CAIRO
GOVERNORATE BOUNDARIES
INTERNATIONAL BOUNDARIES
25�E 30�E 35�E
WEST BANK
To AND GAZA To
Darnah M e d i t e r r a n e a n S e a Tel Aviv
Salum
Marsa Matruh Damietta
1Sheikh
Kafr el 2
Alexandria Port Said El'Arish
L i b y a n P l a t e a u 3 JORDAN
Damanhur El Mansura ISRAEL
4 6Tanta7 9
Shibin el Kom Zagizig Ismailia NORTHERN
5 Benha8
11
10 SINAI
30�N
Qattara CAIRO
12 30�N
Giza Suez
Depression
Qara Taba
El Fayoum SOUTHERN
Siwa SUEZ
MARSA MATRUH EL FAYOUM SINAI
Beni Suef Gulf
BENI SUEF Abu Zenima
of Aqaba
G I Z A Suez SAUDI
of
Ras Gharib
AL MINYA El Tur
ur Gulf
Al Minya E ARABIA
a
s
LIBYA Nile AL BAHRt e
ASSIUT Assiut r Al Ghurdaqah
River AL AHMAR n
W e s t e r n Bir Seiyala
Sohag D
L SOHAG e Red
i Qena Quseir .
b D e s e r t se Sea
y QENA
Luxor rt
a A L W A D I Mut. El-Kharga
25�N n A L J A D I D Marsa 'Alam 25�N
D ASWAN
e Kom Ombo
s Aswan Dam Aswan
e
To
Jalu r
t Lake
Nasser
Halaib
S U D A N
0 50 100 150 200 Kilometers
To To To
Dongola Berber Port Sudan
This map was produced by the Map Design Unit of The World Bank. 0 50 100 150 Miles
20�N The boundaries, colors, denominations and any other information 20�N
shown on this map do not imply, on the part of The World Bank
Group, any judgment on the legal status of any territory, or any
endorsement or acceptance of such boundaries.
25�E 30�E 35�E
NOVEMBER 2004