Economic Update

31 Aug, 2017

Egypt’s microfinance segment is gaining new momentum thanks to central bank and government initiatives.

In August state-owned investment bank NI Capital launched a LE50m ($2.8m) microfinance arm called Tamweely (Arabic for “Funding”) in conjunction with government-backed private investment entity Ayady for Investment and Development, and Cairo-based private equity firm Post for Investments.

NI Capital, a privately managed and incorporated subsidiary of the National Investment Bank (NIB), said Tamweely was part of its commitment to provide finance and capital mechanisms to bolster the local economy, with a focus on Upper Egypt and the Nile Delta.

Egypt’s largest lenders partner with central bank on microfinance

The Tamweely announcement followed the May launch of a new microfinance programme by the Central Bank of Egypt (CBE), which aims to extend LE30bn ($1.7bn) in funding to as many as 10m customers over the next four years.

The initiative is the result of collaboration between the Egyptian Microfinance Federation (EMF) and the Egyptian Financial Supervisory Authority (EFSA). Eight banks are participating, including the country’s two biggest lenders, National Bank of Egypt (NBE) and Banque Misr; Commercial International Bank (CIB), the biggest private sector bank; and the sharia-compliant Faisal Islamic Bank.

Under the programme, the lenders will extend subsidised funding to three microfinance companies and a further 752 institutions accredited by the EFSA, which in turn will offer loans and other financing packages to individuals and small enterprises.

Speaking to press at the plan’s launch, Hisham Ezz El Arab, chairman of CIB and head of the Federation of Egyptian Banks, said the country’s banks need to make microfinance a central part of their strategy and highlighted how technology would play an integral role in the plan.

Tarek Amer, governor of the CBE, reiterated the latter point at the same event, saying the central bank would look at rolling out a mobile payment policy for the initiative. There are an estimated 7m mobile money users in Egypt, according to Amer, representing about 7% of the population.

The CBE’s moves to facilitate growth in the microfinance segment dovetail with its broader push for financial inclusion, which includes a new small and medium-sized enterprise (SME) funding strategy.

Announced at the start of last year, the plan aims to increase SMEs’ share of commercial banks’ loan portfolios to 20% by 2020 – up from 5-10% currently – and mandates that interest rates for SME lending should not exceed 5%.

This is significantly lower than market rates, with the central bank’s overnight lending rate currently at 19.75%.

Economic recovery to help fuel microfinance expansion

The new programmes should provide a further boost to what is already a rapidly expanding segment: microfinance funding grew by 23% to reach LE5.5bn ($310.9m) across the first half of this year, according to the EFSA. Meanwhile, the number microfinance beneficiaries increased by 10%, reaching 2m by June.

Financing over the period was focused mainly on commercial enterprises, which accounted for 61.5% of funds extended, followed by the services sector (18%), agriculture (13%) and productive and crafts activities (7.4%).

EFSA figures show that the number of microfinance institutions has grown significantly over the past few years, rising from around 400 in late 2015 to 787 today, with a total of 1500 branches (including head offices) countrywide.

With GDP growth expected to pick up from 3.5% in 2017 to 4.5% in 2018, according to the IMF, an improving macroeconomic environment could help engender greater confidence among lenders and subsequently boost lending to smaller businesses. 

The structure of Egypt’s economy should also lend itself to the segment’s further expansion, with around 97% of companies employing fewer than 10 workers, according to the Central Agency for Public Mobilisation and Statistics.

The segment still faces challenges, however. Many microenterprises and SMEs do not carry out formal financial auditing and reporting, while high inflation and interest rates make offering credit cheaply unattractive to some institutions. “SMEs undoubtedly represent the main engine of growth for Egypt’s GDP in general and the microfinance segment in particular,” Amro Abouesh, CEO of Tanmeyah Micro Enterprise Services, told OBG. “However, if we want more companies to integrate into the formal economy, some additional efforts have to be made by authorities to encourage Egyptian informal SMEs to implement financial auditing and reporting mechanisms.” 

Whether the segment can grow as a commercial enterprise, rather than a government-backed programme with an element of development support and corporate social responsibility, will depend on sustained economic growth, careful regulation and tighter financial standards from small businesses.