1 introduction

1 introduction

• 1.
  Money and Banking Introduction Chahir Zaki FEPS, Cairo University Second semester, 2012 Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 1 / 23
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  1 Introduction 2 Financial Markets 3 Banking 4 Money Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 2 / 23
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  Outline 1 Introduction 2 Financial Markets 3 Banking 4 Money Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 3 / 23
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  Introduction To examine how financial markets such as bond, stock and foreign exchange markets work To examine how financial institutions such as banks and insurance companies work To examine the role of money in the economy Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 4 / 23
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  Outline 1 Introduction 2 Financial Markets 3 Banking 4 Money Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 5 / 23
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  Financial Markets Financial markets: markets in which funds are transferred from people who have an excess of available funds to people who have a shortage of funds. Financial markets improve the allocation of capital by channeling funds to entities which use capital most productive. This increases capital productivity and economic efficiency. Hence well-functioning financial markets help accelerate economic growth. Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 6 / 23
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  Financial Markets A bond: is a debt security that promises to make payments periodically for a specified period of time An interest rate: is the cost of borrowing or the price paid for the rental of funds Common stock: represents a share of ownership in a corporation. A share of stock is a claim on the earnings and assets of the corporation Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 7 / 23
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  Stock market: theEgyptian case EGX 30 index, previously named CASE 30 includes the top 30 companies in terms of liquidity and activity. 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1/12/2010 8/12/2010 14/12/2010 20/12/2010 26/12/2010 30/12/2010 5/1/2011 12/1/2011 18/01/2011 24/01/2011 24/03/2011 30/03/2011 5/4/2011 11/4/2011 17/04/2011 21/04/2011 2/5/2011 8/5/2011 12/5/2011 18/05/2011 24/05/2011 Source: Constructed by the author using the stock market data. Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 8 / 23
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  Foreign exchange market The foreign exchange market: is where funds are converted from one currency into another. The foreign exchange rate is the price of one currency in terms of another currency The foreign exchange market determines the foreign exchange rate Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 9 / 23
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  Foreign Exchange Market 7,00 6,00 ER 5,00 4,00 3,00 2,00 1,00 0,00 juin-99 juin-00 juin-01 juin-02 juin-03 juin-04 oct.-98 oct.-99 oct.-00 oct.-01 oct.-02 oct.-03 oct.-04 févr.-99 févr.-00 févr.-01 févr.-02 févr.-03 févr.-04 Source: Selim (2010) Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 10 / 23
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  Principal currencies 1998 2001 2004 2007 2010 US dollar 86.8 89.9 88.0 85.6 84.9 Euro ... 37.9 37.4 37.0 39.1 Deutsche mark 30.5 ... ... ... ... French franc 5.0 ... ... ... ... ECU and other EMS currencies 16.8 ... ... ... ... Slovak koruna ... 0.0 0.0 0.1 ... Japanese yen 21.7 23.5 20.8 17.2 19.0 Pound sterling 11.0 13.0 16.5 14.9 12.9 Australian dollar 3.0 4.3 6.0 6.6 7.6 Swiss franc 7.1 6.0 6.0 6.8 6.4 Canadian dollar 3.5 4.5 4.2 4.3 5.3 Hong Kong dollar 1.0 2.2 1.8 2.7 2.4 Swedish krona 0.3 2.5 2.2 2.7 2.2 Other 13.3 16.1 17.0 22.0 20.5 Total 200.0 200.0 200.0 200.0 200.0 Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 11 / 23
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  Outline 1 Introduction 2 Financial Markets 3 Banking 4 Money Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 12 / 23
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  Banking Financial Intermediaries: institutions that borrow funds from people who have saved and make loans to other people Banks: institutions that accept deposits and make loans Other Financial Institutions: insurance companies, finance companies, pension funds, mutual funds and investment banks Financial Innovation: in particular, the advent of the information age and e-finance Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 13 / 23
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  Banking sector: theEgyptian case Number of Banks and Banking Density End of June 2004+ 2005 2006 2007 2008 2009 Total Number of Banks Operating in Egypt 61 52** 43*** 41*** 40*** 39*** Total Number of Branches 2783 2841 2944 3056 3297 3443 Banking Density+ 24.9 24.8 24.5 24.2 22.9 22.3 Number of Public Sector Banks 7 7 7 6 6 5 Number of Branches of Public Sector Banks 2153 2185 2222 2074 2089 2088 Number of Private Sector Banks 35 34 29 28 27 27 Number of Branches of Private Sector Banks 571 607 674 930 1145 1270 Number of Private and Joint venture Banks 19 11 7 7 7 7 Number of Branches of Private and Joint venture Banks 59 49 48 52 63 85 *Population in thousand / Banking unit. + Egyptian banks abroad are not included , also two banks established under private laws and are not registered with CBE :the Arab International Bank,and Nasser Social Bank . ** The decrease was because seven branches of foreign banks ended their business. *** The decrease was because seven branches of foreign banks ended their business. Source: CBE (2011) Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 14 / 23
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  Outline 1 Introduction 2 Financial Markets 3 Banking 4 Money Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 15 / 23
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  Money and Monetarypolicy Evidence suggests that money plays an important role in generating business cycles. Recessions (unemployment) and booms (inflation) affect all of us Monetary Theory ties changes in the money supply to changes in aggregate economic activity and the price level. The government uses monetary policy to influence economic aggregates. Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 16 / 23
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  Monetary Policy andInflation The aggregate price level is the average price of goods and services in an economy A continual rise in the price level (inflation) affects all economic players Data shows a connection between the money supply and the price level Interest rates are the price of money Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 17 / 23
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  Money and Monetarypolicy 900000 800000 700000 600000 500000 M2 400000 300000 200000 100000 0 0 100 200 300 400 500 CPI Source: Constructed by the author using the CBE data. Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 18 / 23
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  58 Banking sector: theEgyptian case Central Bank of Egypt – Annual Report 2009/2010 Annual CPI and Price Index of Food & Non-Alcoholic Beverages (Urban) % 24 20 16 12 8 4 09 10 v. ly n. g. p. c. r. ay b. . . ar ct Ap Ju No 20 Ja 20 Au Se De Fe M O M n. n. Ju Ju All Items Food & Non-Alcoholic Beverages Source: CAPMAS Source: CBE (2011) The inflation of food and non-alcoholic beverages accelerated to 18.5 percent in the reporting year (from 12.2 percent in the previous FY). In spite of the fall in international food prices by 4.8 percent in the reporting year, it did not curb the rise in inflation rate at the domestic level, indicating the weak response of local2012 Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, markets / 23 19
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  Bankingreporting yearof(fromEgyptian inthebeverages accelerated to of thepercent The inflation food and non-alcoholic in the sector: the 12.2 percent case previous FY). In spite 18.5 fall in international food prices by 4.8 percent in the reporting year, it did not curb the rise in inflation rate at the domestic level, indicating the weak response of local markets to the changes in international food prices, especially when they take a downturn. % International and Domestic Prices of Food (Change Rate) 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 International Prices -20.0 Domestic Prices -25.0 -30.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008/2009 2009/2010 Source: IMF Source: CBE (2011) The rise in the share of food and non-alcoholic beverages was ascribed to stronger contributions of most subgroups, especially vegetables (3.9 percentage points against 1.7 point) and meat and poultry (2.8 points against 1.5 point). However, declines were observed Money and Bankingof fish (-0.2 point against 0.7 point) / 23 Chahir Zaki (FEPS, Cairo University) in the groups Second semester, 2012 20
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  Monetary Policy andFiscal Policy Monetary policy: is the management of the money supply and interest rates Conducted in Egypt by the Central Bank of Egypt (CBE) Fiscal policy is government spending and taxation Budget deficit is the excess of expenditures over revenues for a particular year Budget surplus is the excess of revenues over expenditures for a particular year Any deficit must be financed by borrowing Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 21 / 23
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  billion and 6.9percent a year earlier. Such developments reflect the increasing ratio Fiscal policy low as 3.5 percent byto mention that the afiscal policy aimsdecreasing of overall deficit/GDP. It is worthy such ratio to as FY 2014/2015, as prerequisite for to reduce the ratio of domestic public debt/ GDP. Ratios of Expenditures, Revenues & Overall Deficit / GDP % 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Revenues Expenditures Deficit Hereunder is a follow-up of the execution of the consolidated fiscal operations Source: the general government in FY 2009/2010, according to the preliminary actual data of CBE (2011) of the Ministry of Finance: Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 22 / 23
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  References Mishkin, Introduction Mishkin, chapter 1. Central Bank of Egypt. Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 23 / 23