Why do private banks lend preferentially to politically connected firms? Focusing on the case of Egypt during the later years of Mubarak's rule, we identified politically connected firms, and we documented, using the Orbis corporate data on large firms in Egypt, that they received a disproportionate amount of the loans going to the private sector during 2003–11. We then investigated the determinants of their borrowings, and we found evidence that connected firms were more attractive to banks both because they made larger profits, and because they were seen to be implicitly guaranteed by the state against failure. We also found evidence that non-connected firms had a lower demand for loans.

Among the triggers of the Egyptian Revolution are the sentiments of resentment against the convoluted alliances between private businesses and policymakers that deprived the masses of their fair share of the high GDP growth. But does this indictment extend to the Egyptian banking sector? Based on a field survey and a dataset of 3218 business loans made by 33 banks during 1999–2010, this research differentiates between growth catalysts and crony coalitions within the Egyptian banking sector. The results of the Generalized Estimating Equations reveal that preferential lending to politically-connected businesses has a negative impact on employment and income distribution. Loans to small and medium enterprises and public firms help enhance income distribution and job generation, albeit that the soft-budget constraint on loans to public firms deters growth. The paper presents some policy recommendations that could help exorcise patrimonialism and clientelism and enhance growth alliances within the sector that controls most of the credit flow in the Egyptian economy. The study is not only of grave importance to the Egyptian nation whose members are actively engaged in refurbishing its institutional framework, but is of equal significance to other emerging economies that are keen to install equity, political stability and socioeconomic prosperity.

Why do many States in transitional economies lack the regulative capacities to evenly distribute property rights among emerging private firms resulting in having public good devoured by particularistic interests? I argue that uneven distribution of property rights is deeply embedded within broader power relations permeating political regimes. This study attempts to develop the concept of politically-embedded cronyism where State incumbents generate and protract uneven distribution of property rights in favor of a few private actors as tactics of regime survival that go beyond the mere interest of self-enrichment as the capture thesis would argue. Politically-embedded cronyism is likely to emerge the more State incumbents retain their relative autonomy from their cronies through higher concentration of power in the executive, less role of societal groups in general and business in particular in the reproduction of the power of top incumbents and higher public asset retention in the post-liberalization period in addition to possessing channels of political incorporation to fledging business.