Opinion | How are large loans granted?

There is a common, but mistaken, belief that when a bank grants a loan worth billions of pounds to a large company, it deducts these funds directly from customer deposits in an arbitrary manner. The reality, from both a scientific and banking perspective, is entirely different and is governed by a “precise rule or balance” established by the supervisory authority, namely the Central Bank of Egypt (CBE). The rule states that loans are attributed to “equity”, not to deposits. More importantly, it should be understood that a bank’s capacity to lend to a single client is not measured by the volume of deposits it holds, but by its capital base (equity).   Maximum credit exposure The CBE sets strict limits preventing banks from granting a single client, or related parties, credit exceeding 15% to 25% of the bank’s capital base. Why? To ensure that risk is not concentrated in the hands of a single client, regardless of size. Banks also operate in accordance with international standards, specifically the Basel Accords, which impose what is known as the Capital Adequacy Ratio (CAR). This ratio requires banks to maintain a sufficient level of high-quality capital to absorb potential risks in their assets, particularly loans. In simpler terms, a bank does not lend unless it has sufficient “buffers” from its own funds, namely capital and retained earnings, to cover these risks, independently of depositors’ money.   Syndicated loans: distributing risk   When a loan is exceptionally large, banks resort to what is known as a syndicated loan, where professional expertise is clearly demonstrated. No single bank bears the risk alone; instead, the loan is distributed among a group of banks, meaning the risk is shared. Each bank participates with a share proportionate to its limits and capital base. This approach represents a form of “collective insurance” that protects the banking system from individual shocks. But how does a bank ensure repayment? The lending process is not merely about signing contracts; it goes through several complex stages. First, there are feasibility studies and cash flow assessments. Banks do not rely solely on tangible collateral, but on the project’s ability to generate sufficient income to service the loan. Then there is the provisioning system. At the first sign of potential default, banks are required, under central bank regulations, to build provisions from their profits to address the risk. This means that the bank’s profits are affected first, while deposits remain fully secure and protected by regulatory safeguards. Depositors’ funds are not the sole driver or benchmark for granting large loans; rather, lending decisions are based on the bank’s financial strength, capital base, and compliance with strict central bank regulations. The Egyptian banking system applies some of the most up-to-date supervisory standards globally, ensuring that any default is managed through professional technical mechanisms, such as restructuring, provisioning, and collateral, without affecting the safety of individuals’ savings.   Mohamed Abdel Aal – Banking expert  The post Opinion | How are large loans granted? first appeared on Dailynewsegypt.