Financial inclusion has become a more prominent component of government strategy over recent years, as authorities work to meet the demands for social justice which have arisen from Egypt’s recent political transition. Elsewhere on the continent, microfinance regulation has also played a large role in raising financial inclusion across segments of society, and in Egypt a similar trend is gathering momentum. In addition, the sector is well placed to support widespread lending growth.
Early Stages
Egypt was on the verge of introducing its first microfinance law in 2011, when the political unrest of that year knocked the government’s economic development agenda off course. When the new legislation was finally introduced in November 2014 it radically overhauled the nation’s small microfinance industry. This opened the market – which had previously been solely served by NGOs operating funding programmes with tranches of bank credit – to commercial microfinance institutions for the first time. Like all segments in the banking sector, the free float of the Egyptian pound in November 2016 has significantly reshaped the market’s needs. “The currency flotation has triggered a sharp increase in demand for microfinancing products, particularly among small and medium-sized enterprises (SMEs),” Amr Abouesh, chairman and CEO of Tanmeyah Micro Enterprise Services, told OBG.
The Egyptian Financial Supervisory Authority, which was rebranded as the Financial Regulatory Authority (FRA) in 2017, was granted oversight of the segment, with the exception of the microfinance activities of banks and the operations of the Social Fund for Development. With the law’s introduction, market participants had to meet best-practice requirements in the areas of debtor rights, creditworthiness checks, transparency, client debt burden and advertising standards, among others. This development was heralded as a major step forward for the nation’s microfinance industry. The clarity provided by the 2014 regulatory framework has brought about a flourishing of microfinance activity in the intervening period. By 2017 the FRA had licensed three commercial microfinance companies and 750 NGO microfinance institutions (MFIs).
This recent rise of MFIs has improved financial inclusion for women in particular. Sherif Samy, head of the FRA, told local press in early 2017 that there were 1.3m female recipients of microfinance in the country, with women representing 66% of the total clients in this segment. Samy added that around half of microfinance facilities are directed to commercial activities, while the remainder is distributed among the production, agricultural and service sectors.
Banks
To date, the role of banks in microfinance has been largely limited to providing tranches of funding to the NGOs and MFIs, which are incapable of funding their own operations due to a prohibition on them accepting deposits. In 2012 National Bank of Egypt (NBE), which by that time had disbursed around LE600m ($39.5m) in micro-loans via MFIs, decided to lend directly to the informal market with loans of up to LE25,000 ($1650). In doing so, NBE was assuming responsibility as the industry’s flagship institution to develop the segment, and its venture into unsecured, direct micro-lending has yet to be emulated by the rest of the industry. “The banking system is healthy and liquid, and given the current loan-to-deposit ratio, there is plenty of room to increase lending in Egypt,” Hassan Abdalla, CEO of Arab African International Bank, told OBG.
In August 2017 state-owned investment bank NI Capital launched a LE50m ($3.3m) 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 National Investment Bank, said Tamweely was part of its commitment to providing finance mechanisms to bolster the local economy, with a focus on Upper Egypt and the Nile Delta.
Government Plans
The Tamweely announcement follows the new microfinance initiative launched in May 2017 by the Central Bank of Egypt (CBE). The scheme, developed in partnership with the Egyptian Microfinance Federation and the FRA, intends to direct LE30bn ($2bn) to approximately 10m beneficiaries by 2021, and will see eight banks offering subsidised funding to three microfinance companies and a further 752 institutions accredited by the FRA. These, in turn, will offer loans and other financing packages to individuals and small enterprises. According to the CBE, the initiative will be rolled into the central bank’s SME-funding initiative, which requires banks to allocate 20% of their portfolios to SME businesses by 2020, with microfinance undertaken for the scheme counting towards the SME quota. “This mandate by the CBE will definitely improve the availability in funding for SMEs and boost GDP growth in years to come, since 50% of the economy is still informal,” Mohamed Abbas Fayed, CEO and managing director of Bank Audi, told OBG.
Speaking to press at the plan’s launch, Hisham Ezz El Arab, chairman of Commercial International Bank 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 that 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. This sentiment is backed by other industry players as well. Hussein Ahmed Ismail Refaie, chairman and managing director of Suez Canal Bank, told OBG, “Digitalisation should serve as an engine of growth for the sector, since it will allow banking institutions to reach out to an increased number of SMEs and individuals.”
Looking Ahead
The LE30bn ($2bn) in microfi-nance funding that the CBE aims to generate will go some way to meeting current demand. In December 2016 former CBE governor and chairperson of FA Group for Financial Consulting, Mahmoud Aboul Oyoun, estimated that 18m people in Egypt were in need of microfinance services. Based on an average loan size of LE15,000 ($988), this would suggest a LE54bn ($3.6bn) financing requirement. One of the more interesting questions in the coming period will be the extent to which banks move to meet this demand. The new CBE initiative allows recipients to access direct funding from the Microfinance Projects Development Authority, but also the banks themselves. Even so, whether the lenders who have been reticent to date will make more assertive moves into the microfinance segment remains to be seen.
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