The Central Bank of Egypt (CBE) has reduced the required reserve ratio (RRR) on domestic currency deposits, effective immediately, it said in a statement on Tuesday.
The CBE said it had reduced the ratio from 14 per cent to 12 per cent, citing the "current liquidity situation" caused by domestic and global developments.
Legal reserves are non-interest funds which banks deposit with the CBE to reduce risk.
"This measure will provide permanent liquidity into the banking system and help ease credit conditions in the market," the CBE's statement said.
Reserve requirements are levied on all banking deposits, except for certificates of deposits (CDs) in Egyptian pounds.
Such a move could have a positive impact on the profitability of banks, allowing them to use large proportion of their deposits.
Banks pay their customers interest on 100 per cent of their deposits but are only able to lend 84 per cent. This has now changed to 86 per cent.