Since the waves of social unrest that swept across the Middle East in 2011, governments from Morocco to Oman have responded with strategies aimed at including a greater proportion of society within the nation’s formal economy; however, these efforts to date have met limited success. According to the Consultative Group to Assist the Poor, a global partnership of over 30 organisations seeking to advance financial inclusion, nearly 70% of adults in the Arab world – which has a total population of 168m – lack access to a basic bank account. By comparison, 61% of the global population is banked, while the OECD average stood at 94% in 2017.
This challenge is particularly acute in Egypt. Recent studies have cited differing figures for the banking participation rate; most estimate that between 10% and 14% of the population holds a bank account, while the central bank placed the figure at 32% in 2017. A large informal sector and the prevalence of cash transactions have blocked economic growth and hindered government efforts to raise much-needed revenue for decades. With an economically progressive government coming to power in 2014, the issue of financial inclusion has been brought to the fore.
In late 2014 the Central Bank of Egypt (CBE) introduced regulations to allow banks to set up mini-branches, introducing a range of less onerous capital requirements, depending on the branch’s location, in an effort to encourage the expansion of branch networks in areas with low banking coverage. The response from the market followed quickly: in early 2015 Blom Bank announced that it intended to open five new mini-branches over the year, while Egyptian Gulf Bank revealed plans to establish 10 small branches across a range of governorates.
A year later, the CBE made another change to its regulatory framework as part of its financial inclusion agenda, adjusting its lending regulations in a bid to encourage banks to extend credit beyond their usual customer base. The new regime established maximum loan limits for corporate borrowers to discourage credit concentration on lenders’ balance sheets, as well as new affordability criteria for retail borrowers to reduce credit risk in banks’ rapidly expanding retail portfolios. Both of these regulatory innovations have the potential to diversify the loan portfolios of Egypt’s banking sector and divert more financing to smaller, previously overlooked businesses. To assist this endeavour, authorities are working to gradually formalise the country’s large informal sector. “The government is trying to formalise the registration of small businesses, using best practices from other markets like Malaysia,” Mohamed Kafafi, chairman and CEO of I-Score, told OBG. “Given that small and medium-sized enterprises (SMEs) often lack proper records, this would be beneficial for the banking sector.”
Also announced in 2016 was the CBE’s new strategy for improving access to finance for SMEs. The fresh approach is centred on a lower interest rate limit of 5% on SME loans and a requirement that banks gradually increase the share of SME loans in their portfolios to reach 20% of the total by 2020. The new stipulations have received mixed responses, with banks claiming the 5% interest cap negatively affects profitability. Major rating agencies have also raised concerns that the new SME lending quota is driven more by wider economic ambitions rather than a prudential one, and therefore runs the risk of eroding banks’ asset quality. The CBE has, however, permitted lenders to finance qualifying SME loans from their non-interest-bearing regulatory reserves, thereby allowing them to utilise previously unproductive assets to boost their margins. Banks are also allowed to apply higher interest rates on facilities to SMEs with revenues over LE20m ($1.3m), which will further assist them in meeting their SME loan targets without undue losses.
In May 2017 the CBE unveiled the details of its plan to increase the participation of banks in the microfinance arena, stating that microfinance credit can also be included as part of the 20% SME loan portfolio requirement. Banks have traditionally limited their activity in microfinance to providing tranches of funding to NGOs and microfinance institutions, with these organisations then disbursing funds in small loans to SMEs and individuals. However, the new initiative aims to see LE30bn ($2bn) of funding disbursed to 10m beneficiaries by 2021, with loans being offered by both microfinance organisations and banks directly.
In 2017 the CBE also attempted to add momentum to a mortgage initiative that it first rolled out in 2014. Egypt’s basic legal framework for mortgage lending was established as recently as 2001, and access to finance for housing purchases remains a key financial inclusion challenge. The first licensed mortgage finance company opened its doors for business in 2004, but faced considerable difficulties in establishing sources of term finance at rates low enough to offer realistically priced instruments. Similarly, the small number of commercial banks offering housing finance did so at rates that were beyond the reach of average Egyptians, often as part of their retail operations, with lending offered on a collateral basis.
The government’s response was to partner with the World Bank and the International Finance Corporation to establish a new liquidity facility, the Egyptian Mortgage Refinance Company (EMRC), which is mandated to provide funds for refinancing by primary mortgage lenders, including commercial banks. Take up of mortgage facilities, however, remained slow. In mid-2013, according to the EMRC, aggregate mortgage lending stood at LE4.5bn ($296.5m), or around 0.3% of GDP. To improve this, in 2014 the CBE allocated LE10bn ($658.8m) in funding for banks to re-lend in the form of housing loans with terms of 20 years and interest rates of 7-8%. In October 2017 the CBE increased funding for this initiative to LE20bn ($1.3bn).
More broadly, however, there are still significant obstacles to mortgage growth. The average monthly salary for Egyptians, taking into account employees from both the public and private sectors, was around LE4000 ($264) in 2016, according to the Central Agency for Public Mobilisation and Statistics, placing mortgage finance beyond the means of most. A lack of formalisation in the housing sector, with less than 30% of household units registered, further compounds the problem of affordable homes. Nevertheless, the authority’s efforts are starting to bear fruit. In 2017 Euromonitor International named Egypt’s mortgage market as the fastest growing in the world, anticipating mortgage lending to rise by 19%, driven by the completion of major real estate projects and demand from the rapidly expanding population.
The financial inclusion agenda also addresses how most Egyptians make their transactions on a daily basis. Although the banking penetration remains relatively low by global standards, Egypt’s mobile phone penetration was recorded at 110% as of August 2017, according to figures from ALEXBANK. Mobile payment services, therefore, have considerable potential for expansion in the country.
The CBE updated its mobile payment services regulations in November 2016 to allow bank customers to send and receive funds and remittances via their mobile accounts. The move forms part of a wider strategy to limit the widespread dependence on cash transactions. In 2016 a decree established the National Council for Payments, mandating it with reducing the use of banknotes outside the banking system, encouraging the use of electronic payments and developing national payments systems and infrastructure. Chaired by President Abdel Fattah El Sisi, the ultimate goal of the new council is to bring about the merging of the formal and informal economies.
Authorities have accounted for the private sector in the mobile payment strategy as well. The government has recently signed memoranda of understanding with major credit and debit card providers, which have resulted in a substantial number of Egyptians availing them of formal financial services for the first time. An agreement between the government and Visa in February 2016 enabled the electronic payment of government subsidies to 22m Egyptian families, a development which has lowered administration costs and increased the transparency of the subsidy system. Tarek Elhousseiny, general manager for North and West Africa at Visa, said in a statement released at the time, “Today, less than 2% of payments in Egypt are made electronically which is just one reason why this partnership can be so impactful.”
A similar agreement between the Ministry of Communications and Information Technology and MasterCard has enabled some 4.6m state employees to withdraw their salaries from ATMs using their debit card, which they can also use to make purchases at roughly 60,000 point-of-sale terminals dispersed across the country. All told, Egypt’s approach to raising financial inclusion is a multi-pronged, public and private sector effort, and one which is likely to remain near the top of the government’s agenda for years to come.