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VOLUME
Vol.05 Issue01 2025
PAGE NO.
29-41
10.37547/ijmef/Volume05Issue01-07
Household Sector Indebtedness and Its Impact on
Financial Stability Indicators in Egypt
Ali Jawad Al-Kerety
University of Karbala / College of Administration and Economics, Iraq
Hashim Marzoog Ali Alshamari
University of Karbala / College of Administration and Economics, Iraq
Received:
18 October 2024;
Accepted:
21 December 2024;
Published:
21 January 2025
Abstract:
The research examines with studying the problematic relationship between the indebtedness of the
family sector and financial stability by studying the facts provided by economic theory, research and studies, and
then studying the case of Egypt by collecting and analyzing the facts and data related to the studied variables, and
the problem of the research is to question the impact of the indebtedness of the family sector on financial stability
in Egypt, and the hypothesis of the research is that the developments of financial globalization and financial
openness, and by collecting and analyzing the facts Economic and related historical data, as well as the adoption
of the inductive approach by making hypotheses among the studied relationships, and analyzing the relationship
between variables .The research reached a set of conclusions, the most important of which is the weak impact of
family sector indebtedness on financial stability due to the limited amount of bank financing for the family sector
and the structural imbalance in the relationship between family spending and bank credit, and the weak
capabilities of the private sector in accessing and employing finance , and the most prominent recommendations
were the need to follow an economic policy to enhance the role of the family sector in economic growth by
increasing the credit provided to the family sector to enhance economic growth According to the levels of
household debt commensurate with the requirements of sustainable financial stability.
Keywords:
Employing finance, financial globalization, financial openness, historical data.
Introduction:
Today, financial systems have become
the main pillar in economic development, through their
essential role in linking the real and monetary aspects
in a way that ensures the optimal allocation of
economic resources efficiently between economic
activities and the ability to enhance economic stability
and meet the requirements of sustainable economic
growth and economic development. Financial stability
is the state in which the financial system is able to
perform its basic functions in mediation, assessment
and management of financial risks, withstand systemic
and irregular shocks and address imbalances that
hinder the allocation of savings to investment
opportunities and provide an effective and safe
payment mechanism .the developments of financial
activity in light of financial globalization have imposed
levels of great financial openness, increasing the risks
of financial shocks of multiple types and different
levels, which strengthened the importance of the
function of financial systems in achieving financial
stability.
The family sector plays an important role in achieving
economic stability through its essential contribution to
stimulating aggregate demand through spending flows
from the budget of this sector, where the budget of
individuals consists mainly of deposits, real estate and
financial assets, as for the side of liabilities, and the
indebtedness of individuals is the main component of
the obligations of individuals and families, whose main
source is the credit granted to the family sector from
banks and other financial institutions, and therefore
the size of the indebtedness of the family sector is a key
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indicator-among other indicators-at central banks and
multiple financial bodies, to measure the size of debts
and disparities in lending, and find out how much it
effects On the other hand, if there is an increase in
unemployment rates or a decrease in household
disposable income, there may be a need to increase
credit to the family sector to boost spending and
stimulate economic activity, as attention to monitoring
and analyzing the volume of credit provided to the
family sector is an important part of the monetary and
fiscal policy strategy to promote economic and financial
stability and achieve sustainable growth, and in the
case of high rates of household debt and obligations In
this case, it is necessary to take multiple measures to
enhance financial awareness and stimulate the family
sector so that it can manage its debts sustainably.
Egypt has witnessed developments in its financial
systems and its relationship with the indebtedness of
the family sector and its reflection on the level of
financial stability, which has aroused the interest of
scientific research to study the indebtedness of the
family sector in this country in terms of the type, size
and direction of development of its basic indicators and
its impact on the level of financial stability
First: The Significance of the research: the importance
of the research stems from the need to pay attention
to the relationship between financial stability and the
indebtedness of the family sector in Egypt, to adjust the
levels of family debt in accordance with the
requirements of economic stability, growth and
development in light of recent developments in the
reality of the Egyptian economy and its financial
system.
Second: The Research problems: The research
problems is that the developments of the indebtedness
of the family sector represent a fundamental challenge
to the ability of the financial system to achieve financial
stability, which imposes on the central banks accurate
scientific knowledge of the nature, limits and
dimensions of the effects of changes in the size of the
indebtedness of the family sector on financial stability
indicators, to take the necessary measures to make the
levels of indebtedness of the family sector
commensurate with the requirements of growth and
economic stability.
In the light of the above research problems, The posed
problems can be formulated according to the following
main scientific questions:
1 - What is the relationship between the indebtedness
of the family sector and financial stability according to
economic theory and what are the transmission paths
of this relationship in contemporary financial systems
in light of financial globalization and financial openness
and the resulting systemic and irregular economic
shocks.
2-How has the size of the indebtedness of the family
sector developed in Egypt and what are its effects on
the indicators of financial stability in Egypt, and what
measures are needed to make the levels of
indebtedness of the family sector commensurate with
the requirements of growth and economic stability.
3 -What are the results of the analysis of the impact of
household sector indebtedness on some indicators of
financial stability in Egypt for the period (2014-2023).
Third: The Hypothesis: The research is based on the
hypothesis that there is an inverse relationship
between the size of household sector indebtedness
and the level of financial stability in Egypt.
Fourth: The Purpose of the study: The research aims to:
1-Reference to the theoretical relationship between
the indebtedness of the family sector and financial
stability in light of recent developments in financial
systems.
2-Study the impact of the indebtedness of the family
sector on some indicators of financial stability in Egypt.
-3Analysis of the impact of household sector
indebtedness on financial stability indicators in Egypt
for the period (2014-2023).
Fifth: Research approach: The research uses the
deductive approach, by relying on the study of theories,
postulates, general rules and partial applications in
economic theory about the relationship between the
indebtedness of the family sector and financial stability,
by collecting and analyzing the relevant economic facts
and historical data, and employing them in the study of
the case of Egypt, as well as adopting the inductive
approach by putting hypotheses among the studied
relationships, analyzing the relationship between the
studied variables and using statistical analysis tools and
reaching conclusions that prove the research
hypothesis and possible recommendations to employ
the facts that have been proven .
Sixth: Time limits: Represented by the period (2014-
2023), which is the period in which the basic indicators
of the relationship between the indebtedness of the
family sector and financial stability in Egypt appeared.
Seventh: Spatial boundaries: Represented by the state
of Egypt, which is a harmonious sample in its economic
characteristics and has witnessed clear developments
in its financial systems and the indebtedness of the
family sector, reflected in the level of financial and
economic stability.
Eighth: Research structure: Research methodology:
The research was divided into three sections
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The First topic: the theoretical framework and concepts
of the indebtedness of the family sector and financial
stability.
Second Topic: Analysis of financial stability indicators in
Egypt.
The Third topic: Analyzing the impact of household
sector indebtedness on financial stability indicators in
Egypt.
The First topic: the theoretical framework and concepts
of the indebtedness of the family sector and financial
stability.
The First requirement: the indebtedness of the family
sector
First: Household debt
Household indebtedness (family sector) is an economic
phenomenon that many families face in several
countries. Families often borrow for a variety of
reasons, such as buying a house that requires a long
period of saving and deferred consumption, or
financing an investment in education through student
loans. By boosting consumption and investment, debt
can contribute to improving the distribution of
resources and raising the standard of living. However,
an increase in the level of borrowing in households is
not always a positive effect, both at the individual level
and at the level of the family sector as a whole, since
experiences in many countries during the global
financial crisis suggest that a sharp increase in the level
of household debt can increase the risk of financial
crises and economic instability. A high level of
indebtedness in the household sector can significantly
affect the stability of financial indicators (Bank of New
Zealand Reserve, 2014, p.1).
It is defined as the total financial liabilities incurred by
households and individuals, including mortgages, car
loans, credit card loans, student loans, and personal
loans. Household sector indebtedness is measured as a
percentage of GDP, or as a percentage of disposable
income (Michal and others 2016, p.3). Household
sector debts can be classified into two categories:
(Devine 2023: p.7)
The first category: secured debt is any loan on a
secured asset, so if individuals are unable to repay this
debt, the lender can seize that asset (the security
asset). an example of a secured debt is a mortgage
where the mortgaged property is secured.
The second category: unsecured debt, which are loans
provided to individuals without the presence of
security on the assets, in case of non-payment of the
debt, the creditor becomes an ordinary creditor and
participates with the rest of the creditors in any
remaining assets of the borrower. Examples include
personal loans, student loans, and credit card lending,
which are not guaranteed by any tangible collateral.
Second: factors affecting the indebtedness of the
family sector.There are a number of factors that affect
the level of indebtedness of the family sector,
including: ((Albuquerque and Krustev 2015, p.8 )
1-real income: personal income also appears mostly in
the traditional consumption function, where part of the
income gain is translated into higher consumption (the
so-called marginal tendency), the higher the household
income, the greater its borrowing capacity.
2-real interest rate: high interest rates (on conventional
mortgages) encourage saving and, therefore, tend to
correlate with low consumption, the higher the interest
rates, the more expensive it is to borrow.
3-debt-to-income ratio: total household debt,
mortgage debt and consumer credit, which includes car
loans and credit cards divided by personal income.
4-economic confidence: that is, when consumers are
optimistic about the economy, they are more likely to
borrow.
5-unemployment rate: unemployment affects the
ability of households to earn income and even the
unemployment rate exceeds both income expectations
and uncertainty, for example, expectations of higher
incomes in the future (low unemployment rate) are
associated with higher consumption growth. And thus
would enhance the demand for loans .
6-government policies and central bank policy:
governments and central banks can influence the
indebtedness of the household sector through financial
and monetary policies.
7-demographic factors: demographic factors such as
age, education and family status may influence
borrowing behaviors.
In addition to the factors we have mentioned, there are
a number of motives that lead to an increase in
household sector indebtedness in most countries,
including: (Reserve Bank of New Zealand 2014, pp.6-7)
A-financial liberalization and deregulation: financial
deregulation and liberalization can significantly
increase household access to credit and, if
accompanied by increased optimism about future
income and wealth prospects, can strengthen the
household sector's willingness to borrow.
B-Financial innovation in the United States, for
example, has greatly eased restrictions on low-income
home buyers and home buyers with the proliferation of
exotic mortgage products such as interest-only loans,
with little verification of the borrower's income or
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assets, so-called loans ( no income, no job or assets).the
financial innovation of the United States, for example,
has significantly eased restrictions on low-income
home buyers and home buyers.
C-low borrowing costs: the interest rate costs facing
households have decreased over the past decade
compared to the nineties of the twentieth century.
There are a number of factors behind this, including a
decrease in the longer-term trend in real interest rates
(which, equal to everything else, increases the
"sustainable" amount of debt that a borrower can
service), changes in borrowing rates and financing costs
of financial intermediaries due to competition. More
generally, the transition to a low inflation environment
was a symbol of the "Great Moderation" of
macroeconomic fluctuations in the pre-global financial
crisis period. This may have contributed to a decrease
in precautionary saving by households and increased
confidence in taking on more debt.
D-the role of house prices: housing is the main asset
financed by household borrowing, and the rise in house
prices, perhaps driven by low interest rates, population
growth, a shortage of housing supply, or some other
factors, implies that any newcomer or potential entrant
to the housing market must borrow more to buy any
particular house. This effect caused by rising house
prices increases the total household debt, and this may
happen for several years, even after housing prices stop
rising, because the stock of housing is slowly
fluctuating. Moreover, as the value of the collateral
associated with housing lending increases (i.e., the
value of the house increases), households are able to
borrow more to increase non-housing-related
consumption, or to finance other business activities,
and therefore there is a positive correlation between
rising house prices and increases in household debt.
E-rising income inequality: there are macroeconomic
consequences of income inequality and whether the
sharp increase in inequality that occurs in some
countries is related to financial pressures. There is a
correlation
between
income
inequality
and
consumption inequality. Consumption inequality has
not increased to the same extent as income inequality,
suggesting the role of credit markets in mitigating the
very large differences in consumption patterns among
households across the income spectrum.
Third: sources of household sector debt: There are a
number of sources that provide loans to the family
sector, including the following: (Nakornthab 2010,
p.13)
1-
commercial banks are by far the largest official
provider of household sector debt in any country.
2-
state development banks or specialized
financial institutions play an active role in providing
funds to the family sector, for example, in some
countries the Agricultural Bank is the main creditor of
agricultural households.
3-
the sources of housing loans, via non-financial
institutions, the involvement of the public sector is
more visible in the field of Housing Finance. These
include housing authorities, such as housing funds, and
the housing loans division of the Ministry of finance as
applicable in some countries such as Malaysia.
4-
Non-Bank Private financial institutions play the
role of commercial banks and government lenders in
formal family lending, such as domestic and
multinational finance companies.
Informal sources, as there are multiple informal
sources through which the family sector can obtain soft
loans. Examples include the amounts borrowed by
individuals from relatives and friends. it is conceivable
that the share of informal sources of debt is related to
the stage of financial development in a country
The second requirement: the concept of financial
stability, its conditions and the causes of instability.
First: the concept of financial stability
The financial system is in a range of stability whenever
it is able to facilitate (rather than hinder) the
functioning of the economy, dispel financial imbalances
that arise internally or as a result of significant and
unforeseen negative events. Financial system
instability refers to conditions in financial markets that
harm or threaten to harm the functioning of the
economy by affecting the functioning of the financial
system, can arise from shocks that originate within the
financial system and are transmitted throughout that
system, can weaken the financial position of non-
financial units such as households, companies and
governments to the point where the flow of finance to
them becomes restricted, and can disrupt the
operations of certain financial institutions and markets
so that they are less able to continue financing the rest
of the economy (Chant, and others, 2003, p.3).
Financial stability can be defined as the ability of the
financial system (financial intermediaries, markets,
market infrastructure ) to withstand shocks and
disintegration of financial imbalances, thereby
mitigating the likelihood of disruptions in the financial
intermediation process that may be severe enough to
significantly weaken the allocation of savings to
profitable investment opportunities in the economy
(Heinlein, 2022 , p.1) .There is another definition of
financial stability that refers to the preservation of the
basic economic functions of the financial system in
directing savings to investments and providing an
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effective and safe payment mechanism, hence financial
stability is considered to be the state in which the
financial system is able to withstand shocks without
giving way to cumulative processes that hinder the
allocation of savings to investment opportunities and
the processing of payments in economies (Schioppa,
2002,p.20)
By the previous definitions of stability, it can be said
that the stability of the financial system is achieved
when the financial system performs its functions in
financial intermediation and risk management and the
economy's ability to efficiently allocate resources
between economic activities with the ability to absorb
systemic and irregular shocks.
Second: The conditions of financial stability
The ECB defines three specific conditions related to
financial stability: (Morgan and Pontines, 2014: p.4))
1-the financial system should be able to transfer
Resources Efficiently and smoothly from savers to
investors.
2-the financial system should be able to assess and
price financial risks with reasonable accuracy and
manage them relatively well.
3-the financial system should be in a state where it can
comfortably absorb real financial and economic
surprises and shocks. The third condition is perhaps the
most important, since the inability to absorb shocks can
lead to a downward spiral as they are propagated
through the system and become self-reinforcing, which
leads to a general financial crisis and widespread
disruption of the financial intermediation mechanism.
Second topic: analysis of financial stability indicators in
Egypt
The first requirement: indicators of financial stability in
Egypt
First: financial stability indicators
The Central Bank of Egypt calculates the Financial
Stability Index using the empirical normalization
methodology and publishes it annually. The index is
based on four sub-indicators, namely (Arab Monetary
Fund 2023: P. 260(
1-
macroeconomic indicator: this indicator
consists of seven sub-indicators (real GDP growth rate,
general inflation rate, private credit ratio to nominal
GDP, budget deficit ratio to nominal GDP, domestic
public debt ratio to nominal GDP, current transactions
balance to GDP, net foreign reserves ratio to short-term
external debt). the Central Bank of Egypt has given this
indicator a relative weight of 33%.
2-
Financial Markets Index: this index consists of
four sub-indicators (the ratio of market capital to GDP,
the volatility ratio on the Egyptian Stock Exchange, the
ratio of the market value of shares to the return on
equity, the credit risk swap index). the Central Bank of
Egypt has given this index a relative weight of 19%.
3-
the banking sector performance index: it
consists of seven sub-indicators (capital adequacy ratio,
ratio of total non-performing loans to total loans,
coverage ratio, liquidity ratio in local currency and
foreign currencies, ratio of administrative expenses to
net income of activity, ratio of net profits to
shareholders ' equity, concentration ratio in the side of
assets of the largest 5 banks). the Central Bank of Egypt
has given this indicator a relative weight of 38%.
4-
the global economic climate index: this sub-
index includes the real GDP growth rates and inflation
rates of Egypt's main trading partners (the United Arab
Emirates, China, the United Kingdom, the United States
of America, Turkey, Saudi Arabia, Germany,
Switzerland, France, Italy, Russia). the Central Bank of
Egypt has given this indicator a relative weight of 10%.
Table No. (1 ) variables used in calculating the Financial Stability Index in Egypt
Sub-index
Measurement variables
Relative
weight
Macroeconomic
indicator
-
Real GDP growth rate
;
-
General inflation rate
-
The ratio of private credit to nominal GDP
-
The ratio of the budget deficit to the nominal GDP
-
The ratio of domestic public debt to nominal GDP
33
%
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Source: prepared by the researcher based on (Arab Monetary Fund 2023, P.260).
Second: the methodology of preparing the Financial
Stability Index in Egypt
The methodology for preparing the Financial Stability
Index in Egypt shall be according to the following steps
(Central Bank of Egypt, 2019: P. 17)
1-
The Financial Stability Index is prepared as a
composite quantitative measure using a variety of
variables (21 variables) that fall under four sub-
indicators, which are mentioned in the previous
paragraph and reflect the performance of the banking
sector, macroeconomic conditions, the development of
financial markets, and the global economic climate
2-
the indicator is prepared using the empirical
normalization methodology, as the inverse value of
variables that negatively affect financial stability is
used. The indicator is calculated based on the average
of the variables used and weighted with equal weights.
It is worth noting that this methodology may lead to
changes in the historical values of the indicator when
adding data to update it periodical.
3-
The Financial Stability Index as well as the four
sub-indicators shall be prepared using the time series
of variables since 2011 until the latest available date. In
addition, the methodology used to prepare the value of
the Financial Stability Index may be subject to some
modifications, such as changing the calculation
methodology or adding or deleting some variables, to
name a few
Second requirement: analysis of the Financial Stability
Index in Egypt
The value of the general index of financial stability in
Egypt reached (0.51) points in 2021 and (0.40) points in
2022, compared to (0.49) points in 2020, (0.46) points
and (0.50) points in 2018 and 2019, respectively. As
shown in Figure 1, in general, the stability of the values
of the Financial Stability Index in Egypt during the
period from 2016 to 2022 indicates the stability of the
financial and economic systems despite the challenges
they face. It should be noted that the Financial Stability
Index in 2020 witnessed a decrease compared to 2019,
as a result of the consequences of the corona pandemic
-
The balance of current transactions to GDP
- The ratio of net foreign reserves to short-term external debt
Financial
markets index
-
The ratio of market capital to GDP
-
The percentage of volatility in the Egyptian Stock Exchange
-
The ratio of the market value of shares to the return on equity
- Credit risk swap index
19
%
Banking sector
performance
index
-
Capital adequacy ratio
-
The ratio of total non-performing loans to total loans
-
Coverage ratio
-
The ratio of liquidity in local currency and foreign currency
-
The ratio of administrative expenses to net income of the activity
-
The ratio of net profit to shareholders ' equity
-
The percentage of concentration in the side of large assets 6 banks
38
%
The global
economic
climate index
-
Real GDP growth rates
;
-
Inflation rates for Egypt's main trading partners ( UAE, China, UK, USA,
Turkey, Saudi Arabia, Germany, Switzerland, France, Italy, Russia
(
10
%
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on global economies and financial systems. This was
reflected in the global economic climate index, where
most of Egypt's trading partners recorded negative real
GDP growth rates. The financial markets index also
witnessed a significant decline as a result of the turmoil
in emerging financial markets, including Egypt, and the
exit of foreign capital. This led to an increase in both
credit risk swap rates and the EGX Volatility Index, as
well as a noticeable decrease in the ratio of market
capitalization to nominal GDP. Despite this, the banking
sector in Egypt has proven its strength during the
corona pandemic and its ability to cope. Absorbing
many shocks and containing their repercussions,
thanks to good levels of capital adequacy and liquidity
(Arab Monetary Fund 2023, P .260).
Source: prepared by the researcher based on data (Central Bank of Egypt 2023, p.25).
Table (2) the aggregated index of financial stability and its main constituent indicators in
Egypt %
The years
Indicates
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Aggregate index
of financial
stability
0.43 0.44 0.44 0.48 0.46 0.50 0.49 0.51 0.40 0.40
Macroeconomic
indicator
0.56 0.41
0.3
0.29 0.48 0.49 0.60 0.60
-
-
Financial
markets index
0.37 0.46 0.32 0.38 0.62 0.52 0.35 0.46
-
-
Banking sector
performance
index
0.47 0.46 0.55 0.62 0.50 0.48 0.60 0.47
-
-
Global economic
climate index
0.50
0.52 0.52 0.47 0.43 0.49 0.35 0.49
-
-
Source: prepared by the researcher based on the data of (Central Bank of Egypt)
The aggregate indicator of financial stability consists of
several sub-indicators, all of which affect the final result
on the value of the indicator, as follows:
0.43
0.44
0.44
0.48
0.46
0.50
0.49
0.51
0.40
0.40
0
0.1
0.2
0.3
0.4
0.5
0.6
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Figure (1) The aggregate index of financial stability in Egypt
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1-Macroeconomic indicator: The macroeconomic index
in 2020 witnessed a significant improvement in some
macroeconomic indicators, such as a high real GDP
growth rate, a low inflation rate and an overall budget
deficit. These developments are positive and indicate
an improvement in overall economic performance.
However, some challenges remain, such as the high
ratio of the current account balance deficit to nominal
GDP and the low coverage ratio of net international
reserves for short-term external debt. These points
need to be followed up and addressed to ensure the
sustainability of economic growth (central bank of
Egypt, 2020:P.22). In 2021, there was a discrepancy in
the performance of economic indicators during the
fiscal year, despite the improvement in some aspects
such as the high real GDP growth rate and the decrease
in the ratios of the total budget deficit and the current
balance deficit, there are other challenges such as the
high inflation rate and the decrease in the ratio of net
international reserves coverage of short-term external
debt. In the fourth quarter of the fiscal year, there
seems to be a slowdown in economic growth as the
inflation rate continues to rise and the international
reserve coverage ratio decreases. These challenges
may require sustainable economic policies to address
them and ensure the long-term stability of the
economy (central bank of Egypt, 2021:P .20).
In 2022, there was an improvement in some economic
indicators during the second half, such as a decrease in
the ratio of the total budget deficit and the current
balance deficit, in addition to recording a surplus in the
last quarter of the year and an increase in the ratio of
private credit to nominal GDP. These developments
indicate an improvement in financial and economic
performance. However, some challenges remain, such
as a decline in the real GDP growth rate and a slightly
higher inflation rate, as well as a decrease in the
coverage ratio of net international reserves for short-
term external debt. These points need careful follow-
up to ensure the sustainability of economic
improvement (Central Bank of Egypt, 2022: p. 25).
In 2023, there was a discrepancy in the performance of
economic indicators during the first half. Despite the
improvement in some aspects such as the decrease in
the current balance deficit and the recording of a
surplus in the second quarter, in addition to the
decrease in the percentage of the total budget deficit,
there are other challenges such as high inflation rates,
the decline in the real GDP growth rate and the
coverage ratio of net international reserves for short-
term external debt ( Central Bank of Egypt,2023: P25) .
2-Banking sector performance index
The banking sector Performance Index decreased in
2020 as a result of the decline in net profit to average
equity, capital adequacy ratio, liquidity ratio in local
currency, the ratio of provision coverage for non-
regular loans, in addition to the high ratio of
administrative expenses to net income of activity.
However, these indicators continued to adequately
exceed the control and indicative ratios. This decrease
was limited by an improvement in the ratio of non-
performing loans to total loans and a higher ratio.
Liquidity in foreign currency (Central Bank of Egypt,
2020: P.22) in 2021, the performance index of the
banking sector improved as a result of banks
strengthening their capital bases, which was reflected
in the high standard of capital adequacy. The period
also witnessed a decrease in the ratio of non-
performing loans to total loans, the ratio of
administrative expenses to net activity income, in
addition to an increase in the average ratio of foreign
currency liquidity and the average return on equity
(Central Bank of Egypt, 2021:P.20). In 2022, the
performance of the banking sector was relatively
stable, with an index of 0.48. This stability came as a
result of a higher capital adequacy criterion, a lower
0.56
0.41
0.3
0.29
0.48
0.49
0.60
0.60
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Figure (2) The weighted value of the macroeconomic index and
the stability index In Egypt
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International Journal of Management and Economics Fundamental (ISSN: 2771-2257)
ratio of non-performing loans to total loans, and a
higher average ratio of foreign currency liquidity. In
contrast, the ratio of net profit to shareholders ' equity,
the coverage ratio for non-regular loans, and the
average liquidity ratio in local currency decreased, with
this ratio continuing to exceed the regulatory minimum
set by the Central Bank (Central Bank of Egypt, 2022:
p.25).
Source: prepared by the researcher based on the data of Table No. (2).
In 2023, the banking sector performance index declined
as a result of a decrease in the capital adequacy
criterion, due to the inflation of assets and contingent
liabilities weighted by risk weights after the exchange
rate appreciation. Liquidity ratios in local and foreign
currencies also decreased, although they continued to
exceed the regulatory minimum set by the central
bank. In contrast, the ratio of administrative expenses
to net activity income decreased, and the ratio of net
profit to shareholders ' equity increased, with the
stabilization of the ratio of non-performing loans to
total loans, the coverage ratio for non-performing
loans, and the ratio of concentration in assets of the 6
largest banks (central bank of Egypt, 2023: p.25).
Source: prepared by the researcher based on the data of Table No. (2)
Global economic climate index-Global Economic
Climate Index:
The global economic climate index has witnessed
significant fluctuations, as it increased in 2020 as a
result of the recovery in global real GDP growth,
despite the high inflation rates globally (Central Bank of
Egypt, 2020:P.22). However, the index declined during
2021 due to high inflation rates and slowing real GDP
growth (central bank of Egypt, 2021:P .20). This decline
continued in the second half of 2022 as a result of the
sharp rise in inflation rates and the slowdown in GDP
growth of the main trading partners (Central Bank of
Egypt, 2022: p .25). In the first half of 2023, the index
declined again due to the slowdown in real GDP growth
of Egypt's main trading partners, despite lower inflation
rates compared to the same period of the previous year
(Central Bank of Egypt, 2023: p.25).
0.37
0.46
0.32
0.38
0.62
0.52
0.35
0.46
0
0.2
0.4
0.6
0.8
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Figure (3) The weighted value of the financial markets index and the financial
stability index in Egypt.
0.47
0.46
0.55
0.62
0.50
0.48
0.60
0.47
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Figure (4) the weighted value of the banking sector
perfomence index and financial stability indrx in Egypt
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Source: prepared by the researcher based on the data of Table No. (2)
Third topic: analysis of household sector indebtedness
and financial stability indicators in Egypt.
First requirement: household sector indebtedness
index
The improvement of macroeconomic and financial
conditions with the end of the economic reform
program led to an increase in the borrowing capacity of
the household sector, as a result of the low cost of
borrowing, the stability of the exchange rate and real
disposable income. This improvement raised the ratio
of debt service to income, which led to an increase in
credit granted to the household sector( Central Bank of
Egypt, 2019:P13), as shown in Figure ( 6), and the ratio
of the maximum total loan installments for consumer
purposes at the level of 50% and low interest rates
contributed to supporting the ability of the household
sector to obtain a greater amount of credit, supported
by the central bank's initiatives for real estate financing
for low and middle income( Central Bank of Egypt,
2020:P18 ).
Source: prepared by the researcher based on the data of the Central Bank of Egypt, statistics of the Financial Stability
Department.
Through Figure ( 6), we note that the change in the debt
ratio of the family sector is a positive change, as this
percentage increased from (3.7%) in 2014 to (4.5%) in
2015 to continue this gradual increase in the volume of
credit granted to the family sector in Egypt until its
percentage in 2018 reached (23%) of the volume of
credit granted to the private sector( Central Bank of
Egypt, 2017:P6), as a result of low average inflation
rates . In light of the improvement of the overall
economic and financial conditions, the credit granted
to the family sector increased by 23.2% of the credit
granted to the private sector during the period from
2019 to 2020, as the family sector's debt ratio reached
(11.3%). The recovery of economic activity during the
fiscal year 2021-2022 was reflected in the purchasing
power of the household sector through an increase in
national disposable income at a positive real rate and
the stabilization of the unemployment rate at 7.3%,
with the inflation rate continuing at low levels (Central
Bank of Egypt, 2022:P.18). The debt ratio of the family
sector has increased (14.2%) for the year 2021 and
(17.7%) for the year 2022, and the debt ratio of the
family sector has continued to rise, reaching (21.3%) in
2023, i.e. (30.5%) of the volume of credit granted to the
private sector (Central Bank of Egypt, 2023: P22).
0.50
0.52
0.52
0.47
0.43
0.49
0.35
0.49
0
0.1
0.2
0.3
0.4
0.5
0.6
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Figure (5) The weighted value of the global economic
climate index and the index Financial stability in Egypt
Table (3) percentage of the household sector indebtedness index in Egypt
Years
Indicates
2014 2015 2016 2017
2018
2019
2020
2021
2022
2023
Indebtedness of
the family
sector
3.7% 4.5% 5.3% 6.1% 7.2% 8.8% 11.3% 14.2% 17.7% 21.3%
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Source: prepared by the researcher based on Joule data No. (3).
The second requirement: the relationship between the
indebtedness of the family sector and the indicators of
financial stability in Egypt
Financial development, represented by an increase in
the ratio of private credit to nominal GDP, contributes
to strengthening economic growth in the long term.
However, the excessive growth of credit granted to the
private sector may increase the likelihood of a financial
crisis. Periods of growth in credit, which are often
accompanied by relatively low interest rates and
loosening of borrowing standards, are usually followed
by periods of slowdown in the granting of credit when
the financial cycle turns into a downward trend. By
calculating the gap of the ratio of private credit to
nominal GDP in Egypt during the period 2014-2018, we
find that the average positive gaps amounted to (1.2),
which indicates the lack of accumulation of systemic
risks resulting from excessive credit growth during this
period. The size of the negative gap - which has been
formed since September 2017 and reached its
maximum in December 2017-has decreased to (0.1%)
in March 2019. This is due to the continued high rate of
private credit growth with a stable nominal GDP growth
rate (Central Bank of Egypt, 2018:P .1)
The decrease in the negative gap was contributed by
the achievement of a positive gap by the family sector,
which amounted to (0.3%) in March 2019. Despite the
high growth rate of private credit since March 2018, the
negative gap indicates the possibility of granting loans
to the private sector without the formation of systemic
risks (Central Bank of Egypt, 2018:P .10). The credit
granted to the household sector increased by an
average of (23.2%) during the period from July 2019 to
March 2020. This coincided with a decrease in the
average inflation rates to (5.8%). Durable consumer
imports have seen a surge in growth rates, most
notably automobiles. The growth continued during the
period from July 2019 to March 2020, where it was
recorded (48%) . The household credit to nominal GDP
ratio gap turned into a positive gap in September 2019,
compared to a negative gap of (0.2%) in June 2019, and
continued to rise to (0.8%) in March 2020. The increase
in the gap coincided with an improvement in the quality
of the banking sector's assets granted to the family
sector, reducing the ratio of irregular consumer loans
to total loans to (3.3%) in March 2020, compared to
(3.5%) in December 2019. With the ratio of household
credit to its deposits remaining at a low level (14%), this
indicates a decrease in the likelihood of systemic risks
arising from the possible failure of the household
sector (Central Bank of Egypt, 2019:P .13). The success
of economic policies has supported the purchasing
power of the household sector through low inflation
and unemployment rates, coinciding with the stability
of the exchange rate. This led to an increase in the
national disposable income for spending at positive real
rates of about (10.16%) in the fourth quarter of the
fiscal year 2020-2021.
The continuation of the maximum ratio of total loan
installments for consumer purposes to the total
monthly income at the level of (50%), coinciding with
low interest rates, supports the ability of the family
sector to obtain a greater amount of credit, supported
by the central bank's initiatives for mortgage financing
for low and middle income. These policies and
initiatives were proactive measures that contributed to
containing the consequences of the corona pandemic,
as household consumption continued to achieve
positive growth rates, and was the main engine to drive
economic growth and its rapid recovery during the first
year of the outbreak of the pandemic. The
improvement in the economic and financial conditions
surrounding the household sector was then reflected in
the growth rate of credit directed to the private sector.
The growth rate of credit directed to the private sector
took a slightly downward path during the period from
December 2020 to June 2021, while stabilizing at high
levels to record (20.8%) in June 2021. This coincided
3.7%
4.5%
5.3%
6.1%
7.2%
8.8%
11.3%
14.2%
17.7%
21.3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Figure (6) Household Sector Debt Index in Egypt
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with the real GDP growth rate continuing on the
recovery path to reach 7.7% in the fourth quarter of the
fiscal year 2020-2021, with the impact of the first wave
of repercussions on investments and exports receding
and household consumption continuing to achieve
positive growth rates (Central Bank of Egypt, 2020:P
.18).
With the stabilization of the ratio of private sector
loans to deposits at (38%) in June 2022, this indicates
that the expansionary monetary policy until March
2022 and the initiatives launched by the central bank
have contributed to supporting the credit environment
without excessive risk-taking or creating systemic risks
of failure of borrowers, which may threaten financial
stability (Central Bank of Egypt, 2020:P .18).. The
purchasing power of the household sector was
negatively affected as a result of the high inflation rate
according to consumer prices during the first half of the
fiscal year 2022-2023, driven by rising prices for food
and beverages, restaurants and hotels, culture and
entertainment, furniture, household equipment, and
transportation. This prompted monetary policy to raise
interest rates by200 and 300 basis points in October
and December 2022, respectively, in order to control
inflationary pressures. The impact of purchasing power
led to a decrease in imports of consumer goods in the
first half of the fiscal year 2022-2023 by an average of
(35.6%). The fiscal policy adopted a package of
measures on wages and social benefits in order to
reduce the burden of inflationary pressures and
support the purchasing power of the family sector
(Central Bank of Egypt, 2022:P .21). The ratio of private
credit to GDP in June 2023 reached a negative level of
(1.6%), which means that GDP grew at a faster rate
than the growth of loans provided to the private sector.
High inflation has contributed to an increase in GDP,
while loan growth has not kept pace with this rise. The
household sector suffered from a negative credit gap
(Central Bank of Egypt, 2023:P .22).
Therefore, between 2014 and 2023, the proportion of
new loans granted compared to the total value of
goods and services produced in Egypt was generally
stable. This means that the growth of loans has not
been so rapid that it threatens the stability of the
financial system.
CONCLUSIONS
1-
The nature of the positive relationship
between the indebtedness of the household sector and
the cash credit provided to the private sector is
reflected in a positive impact on GDP in the short term
due to the nature of the positive correlation between
the cash credit of the private sector and investment
and consumption as the basic components of total
spending on output.
2-
In Egypt, the success of monetary policies and
prudential supervision of the banking sector
contributed to the creation of a favorable environment
for granting credit, maximizing the ability of the
economy and the financial system to contain various
shocks, which reduced the likelihood of systemic risks
affecting the stability of the financial system with other
challenges such as high inflation rates, low real GDP
growth rate and the ratio of coverage of net
international reserves of short-term external debt.
3-
In Egypt, the relationship between family debt
and financial stability indicates that there is financial
space available to the monetary authority by not
reaching the size of family debt to the level that
threatens financial stability according to available
indicators.
Recommendations
1-
Multiple measures must be taken to enhance
financial awareness and stimulate the family sector so
that it can manage its debts sustainably.
2-
Paying attention to monitoring and analyzing
the volume of credit provided to the household sector
as an important part of the monetary and financial
policy strategy to enhance economic and financial
stability and achieve sustainable growth.
3-
Building macro-prudential indicators to hedge
and warn of high rates of household sector debt and
repayment obligations, to avoid increasing financial
risks and economic tensions.
4-
Follow the monetary policy as a tool to control
the amount of money in the economy, to influence the
indebtedness of the family sector and financial stability
through channels that are appropriate to the level of
development of the banking system and the finance
market, such as the credit channel based on changes in
interest rates or credit volume, being the most
influential in the size of family debt in Egypt.
REFERENCES
Arabic Sources:
Central Bank of Egypt, Financial Stability Report for the
year 2017 .
The Central Bank of Egypt, Financial Stability Report for
the year 2018 .-
Central Bank of Egypt, Financial Stability Report for the
year 2019 .
Central Bank of Egypt, Financial Stability Report for the
year 2020 .
Central Bank of Egypt, Financial Stability Report for the
year 2021 .
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41
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International Journal of Management and Economics Fundamental (ISSN: 2771-2257)
Central Bank of Egypt, Financial Stability Report for the
year 2022 .-
Central Bank of Egypt, Financial Stability Report for
2023
Arab Monetary Fund, Financial Stability Report in the
Arab countries, 2023.
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