Finance Fundamentals The Effects of Mergers
The Effects of Mergers & Acquisitions on
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Mohamed Mubasher, Mohamed Fayed, Sherif Ramzy
& Nabil Ahmed
The Effect of Mergers and Acquisitions on Bank Performance in Egypt
Due to the increase in globalization, banks have to be working on a very high level in order to be effective and increase their productivity for the survival of the banks. This being said, Egyptian banks have been working on several improvements throughout these past couple of years regarding both efficiency and competitiveness. One of the key changes they made was the issuance of banking law 88 of 2003 which concluded that banks were to raise their capital over a period of three years ending 2006. Therefore, this led to a massive wave of mergers and acquisitions and therefore increased the number of operating banks throughout the country in just a couple of months.
In order to calculate the efficiency of these banks, we used a technique named Data Envelopment Analysis (DEA) in order to calculate the total efficiency of the banking sector pre and post consolidation.
The study covered a homogeneous set of units, namely the pool of commercial banks in Egypt. The hypothesis is that the wave of consolidation has led to greater overall banking efficiency. Moreover, the study used traditional financial ratios to assess changes in other factors that are unaccounted for, such as profitability change or profit efficiency. The current study is important for two main reasons. On one hand, it is the first study that uses a nonparametric technique to assess the banking sector efficiency in Egypt’s pre and post consolidation, and it complements the international banking efficiency literature, which is substantially skewed towards the banks of developed countries.
Egyptian Economic Development
Since the Egyptian revolution back in 2011, the Egyptian government has been trying to restore financial stability with any possible aspect. The government has also made several changes in order to improve the business environment after years of political turmoil, this came by them consolidating public finances through fiscal reforms and allowing market forces to determine the exchange rate. Authorities have also decided to gradually decrease subsidies over products such as fuel or electricity, this has been a very notable achievement.
Regarding other developments in the banking sector, the Egyptian government put its priorities on banks in Egypt and aimed to consolidate them. This took place when they decided to raise competitiveness between banks in Egypt and eliminate any low performers. One of the main factors that contributed towards this development was the issuance of the Unified Banking Law of 2003 (UBL). The purpose of this law was that it required all national banks to raise their paid-in capital from LE 100 mil. to LE 500 mil. and also raise the capital adequacy ratio from 8% to 10% for the risk weighted assets. As a result, from the years 2003 to 2006, the Egyptian banking sector witnessed a major wave of consolidation. So basically, they were able to identify the small banks and poor performers and therefore they were targeted for acquisition as they could not abide the modified regulations in the timeframe they were provided. In addition, foreign banks were also deeply involved in these acquisitions and were able to infiltrate the Egyptian banking sector on a huge scale, especially after the government refrained from issuing new banking licenses. Foreign interest was portrayed by the participation of foreign players in the bids that took place to acquire stakes in National Egyptian banks. These international banks included BNP Paribas, Barclays, Piraeus, Credit Agricole, Societe Generale, BLOM ; Audi among others.
Data Envelopment Analysis (DEA)
Data envelopment analysis is a nonparametric method in operations research and economics for the estimation of production frontiers, its also used for empirically measuring productivity, efficiency, and provides decision making units.
In order to measure managerial efficiency, DEA has to be put in place. With the variable returns,