Egyptian Financial Market

By: Mohamed Ismail Megahed

History & BriefOne of leading emerging market in MENA, started

with Alex. Stock exchange in 1883 and followed by Cairo Stock exchange that established in 1903, and then there were united in one stock exchange “Egyptian Stock Exchange – EGX”

It has an active stock market with shares of more than 200 companies in 17 sectors like; Real Estate, Technology, Oil & gas, telecommunication, .etc.

There is no tax paid by investors neither on capital gain nor dividends

EGX EGX introduced a new price index; EGX 100

Price Index, on 2nd of August 2009, which tracks the performance of the 100 active companies, including both the 30 constituent-companies of EGX 30 Index and the 70 constituent-companies of EGX 70 Index.

conditions must be followed for listing on EGXAll listed securities must be dematerialized and their

capital fully paid prior to listing on EGX.The company’s by-laws & the issuing terms should

not include any restrictions on the trading of the securities to be listed.

Listing should be made for all the issued securities and any subsequent issues must be listed within three months from the date of registry at the Commercial Registry.

To list on EGX, the issuer must sign an agreement with the Exchange whereby the issuer agrees to abide to the listing rules and ongoing obligations of EGX.

Financial regulation:A form of regulation or supervision which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system, this may be handled by either a government or non-government organization. Financial regulation has also influenced the structure of banking sectors, by decreasing borrowing costs and increasing the variety of financial products available

Financial regulation Objectives: market confidence – to maintain confidence

in the financial systemfinancial stability – contributing to the

protection and enhancement of stability of the financial system

Consumer protection – securing the appropriate degree of protection for consumers.

Reduction of financial crime – reducing the extent to which it is possible for a regulated business to be used for a purpose connected with financial crime.

Trading System

The trading system at EGX has perceived gradual development from an outcry system (prior to 1992) to an automated order-driven system. As a result of the growth in business, the Exchange got hold of a proven and scalable system conforming to international standards and up to date technology.

In May 1998, EGX contracted with "efa", a Canadian software company (which was first bought by the Australian Computershare company and was recently acquired by the leading international technology provider "OMX"), to provide a new trading, clearing and settlement system. The trading component of this system started operations in May 2001, after applying a locally developed automated trading system for almost 9 years.

Trading System

Moreover, EGX offers an in-house developed OPR program that deals with the IPO's and private placements before execution in the market. This program facilitates orders' registrations and cancellations, assures accurate calculations of the allocation percentages and enables the market to absorb efficiently the surge in the amount of placements.

Trading Procedures at EGX

Before investors can trade listed or un-listed securities on the Egyptian Exchange (EGX), investors must open a trading account with one of the licensed members or brokerage firms by the Capital Market Authority. Investors can only buy or sell shares through licensed member firms. All investors must open accounts with custodians, which are mainly banks and few member firms, in order that EGX can check on line their outstanding balances prior to any sale transactions.

All members trading in listed or unlisted securities (stocks, bonds, close-ended mutual funds) on EGX must trade via EGX Trading System (CTS).

Members must record their customers’ orders immediately after receiving them. Recording includes the details of the order: order number, security name, client account number, quantity and exact time that the order was received etc.

Trading Procedures at EGX

Members must ensure that the securities being sold are available before execution of the orders and if members are buying securities, they must ensure that the necessary funds are available before the execution of the trade.

Trading starts with an order given by a client or customer to the member firm to buy (or sell) a specified number of shares of a given company at a specified price.

This order will be queued into EGX electronic trading system terminal either at EGX trading floor or the members’ premises. The order is then sent through the trading system to EGX central computers. An order confirmation is immediately routed back to the member firm.

The Cycle of Any Transaction1- Client want to buy or sell a stock or bond2- Consult and contact the brokerage firm3- Formulate order, specify price, quantity and type of

security to be purchased or sold4- The brokerage firm contacts their floor broker, and give

him the buy/sell order At Time T5- Order is processed through the stock exchange At Time T6- Miser For Clearing, Depository And Central Registry

handles the Clearing, Settlement of the shares or bonds At Time T, T+1, T+2

7- Brokerage firm receives the transcripts of ownership or the physical shares themselves

8- Brokerage firm gives the bookkeeper of the client the physical shares or the transcripts of ownership

Order Confirmation Direct Order Entry

Orders received from clients are entered directly into the member’s trading workstation by the respective broker. The orders are checked to make sure that they do not exceed the client, broker and brokerage firm trading limits. It will only be accepted if they are within the limits set by the respective companies in the trading system.

Order ConfirmationOnce the orders are accepted by the trading system, they will automatically be time-stamped by the system and confirmed as accepted via an order status on the remote screen on the respective member workstation. The member can also choose to have the order confirmation printed out on a printer.

Order QueueSimultaneously, these orders will get into the order queue waiting to be matched.

How Banks do underwritingan underwriter gathers official documents pertaining to

the applicant's credit history, personal identification and income. Once the applicant's information is gathered and verified, an analysis takes place.

The underwriting process starts with information gathering. This phase begins when the applicant submits the initial request for a mortgage. Lenders will usually ask for personal information pertaining to identity, residential history, employment status, income, outstanding debts and financial investments. They may request copies of government issued identification, order a credit report, request copies of filed tax returns, and copies of bank statements and paychecks.

How Banks do underwritingAs the underwriting process enters the

second stage, all of the information goes through an official verification. Some of it may be electronically verified through computerized database systems or the information may be manually verified by the underwriter himself. Outstanding debt balances and payment histories could be verified by phone calls to the lenders. Credit reports will most likely be examined for any indications of financial instability.

How Banks do underwritingOnce the information on the application is confirmed, the lender

will order an appraisal of the property. This step in the underwriting process involves participation from both the lender and the borrower. A home inspection is also required and is usually initiated by the loan applicant. The appraisal is to reassure lenders that they are not lending out more money than the home's current market value, while the inspection ensures that the home and its major systems are in good condition.

If for some reason the home appraises at a value lower than the agreed upon sale price, the seller might need to lower the price in order for the buyer to secure lender approval. Modifications to the sale agreement need to occur between the buyer and seller's real estate agents before the underwriting process can proceed. If the inspection turns up items that deflect from the home's value, such as roof leaks, these items might also need to be corrected prior to loan approval.

How Banks do underwritingThe final step that underwriters take is the

analysis of the borrower's information. Underwriters need to determine whether extending the loan makes solid financial sense from the lender's perspective. A debt to income ratio analysis may be conducted, in addition to determining the percentage of the applicant's gross monthly income that will be required to make the loan payment. If extending the loan makes sense to the lender, they will recommend approval for the mortgage application.

How to read securities quotation

How to read securities quotation Columns 1 & 2: 52-Week High and Low - These are the highest and lowest

prices at which a stock has traded over the previous 52 weeks (one year). This typically does not include the previous day's trading.

Column 3: Company Name & Type of Stock - This column lists the name of the company. If there are no special symbols or letters following the name, it is common stock. Different symbols imply different classes of shares. For example, "pf" means the shares are preferred stock.

Column 4: Ticker Symbol - This is the unique alphabetic name which identifies

the stock. If you watch financial TV, you have seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. If you are looking for stock quotes online, you always search for a company by the ticker symbol.

Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this space is blank, the company does not currently pay out dividends.

Column 6: Dividend Yield- The percentage return on the dividend. Calculated as annual dividends per share divided by price per share.

How to read securities quotation Column 7: Price/Earnings Ratio- This is calculated by dividing the current stock

price by earnings per share from the last four quarters. For more detail on how to interpret this, see our P/E Ratio tutorial.

Column 8: Trading Volume - This figure shows the total number of shares traded for the day, listed in hundreds. To get the actual number traded, add "00" to the end of the number listed.

Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at throughout the day. In other words, these are the maximum and the minimum prices that people have paid for the stock.

Column 11: Close - The close is the last trading price recorded when the market closed on the day. If the closing price is up or down more than 5% than the previous day's close, the entire listing for that stock is bold-faced. Keep in mind, you are not guaranteed to get this price if you buy the stock the next day because the price is constantly changing (even after the exchange is closed for the day). The close is merely an indicator of past performance and except in extreme circumstances serves as a ballpark of what you should expect to pay.

Column 12: Net Change - This is the dollar value change in the stock price from the previous day's closing price. When you hear about a stock being "up for the day," it means the net change was positive.

Thanks

Mohamed Ismail MegahedBDA, Finance