If parliament passes the microfinance law, they will enable private companies to provide microcredit, establishing the first legal framework to regulate microfinance institutions (MFIs) in Egypt.
Currently only four Egyptian banks provide microcredit, as well as numerous NGOs, but they do so under the authority of the Ministry of Finance and the Ministry of Social Solidarity, respectively, rather than under laws targeting the microfinance market.
The new legislation will allow companies registered with the Egyptian Financial Services Authority (EFSA) and possessing at least LE 2 million to grant loans of up to LE 50,000.
The EFSA will oversee further regulatory aspects of the new law, which, according to Ghada Waly, microfinance advisor to the EFSA chairman, aims to encourage the microfinance industry by expanding the MFI pool and driving down interest rates with increased competition.
Although targeted specifically for microcredit, or loans, provisions for other microfinance services, such as micro-insurance, are also included in the bill, as insurance comes under the regulation of the EFSA.
The legislation represents a paradigm shift currently taking place in the global microfinance sector, as it transitions from a donor-funded instrument of charity to a source of profit. As the Chairman of Citi Egypt, Aftab Ahmed, put it, “[Recipients of microcredit] are looking to be treated as clients and partners, not beneficiaries of grants . The sector will grow based on access to finance . it will need to grow beyond grants.
Since its first successful manifestation at the Grameen Bank in Bangladesh in the 1970s, microcredit has historically provided small amounts of cash for impecunious borrowers, often women, starting up small businesses.
Waly acknowledged a common criticism of microcredit, that rather than providing a small but necessary boost of capital, debt burdens sometimes drag down borrowers. Furthermore, “Not everyone is an entrepreneur, she said, but also pointed out that microfinance services can compliment the objective of increased financial education, a program currently carried out by the EFSA.
Karim Fanous, executive director of Lead, an NGO currently dominating the Egyptian microfinance scene, expressed his doubts about the new legislation, “Who is this really helping? he asked.
Fanous warned that the companies currently sniffing around the industry are not interested in helping individuals work their way out of poverty, and will only target the largest borrowers, while the average loan currently sought is $192, according to Sanabel, the microfinance network of Arab countries and its calculations of the most active NGO MFIs in Egypt.
Sanabel’s executive director, Ranya Abdel-Baki, expressed concern that the new legislation does not offer a mechanism for operational MFIs to continue to operate – many of which, such as DBACD, are ranked as some of the most financially successful MFIs in the world by Forbes.
“NGOs currently provide 99 percent of microcredit loans in Egypt . it is possible to achieve both financial performance and social objectives . But many of the companies currently seeking to enter the market are purely commercial, she explained.
While the law’s provision for micro-insurance, currently provided by companies such as Alianz and Aga Khan, it does not allow for micro-savings, another key component of poverty reduction. Abdel-Baki explained that micro-deposit does not figure highly on agenda of the Central Bank of Egypt, and so for the foreseeable future, Egypt Post will continue to receive deposits that fall below the minimum required by banks.
More than mail
Mahmoud Gamal El-Din, vice chairman of economic affairs and business development for Egypt Post, explained that Egypt Post first began offering financial services in 1901. And with 3,800 branches, it remains by far the most significant vehicle for financial services for the non-banked population, which constitutes 90 percent of Egyptians.
Rather than stepping back to allow MFIs to potentially fill its role, Egypt Post is looking to defend its position by expanding services.
“We’re now offering a unified financial window to combine all financial services, Gamal El-Din explained, “It’s a technological platform to combine all accounts: savings, money market daily interest in cooperation with Banque Misr, capital guaranteed investment booklet and account, domestic remittances through networks abroad.
To penetrate the expanding market for card-related services, Gamal El-Din said, “We’re issuing debit and pre-paid cards and automating pensions . There already exists a well-established infrastructure for point of sale, and we have our own ATM machines.
He concluded, “We provide [services] for the under classes, which the banks aren’t interested in, the smallest depositors.
However, Egypt Post sees little incentive to engage in microcredit services, as it does not grant credit and is not planning to ask for a credit license, nor does Gamal El-Din foresee involvement in mobile banking transfers.
With almost 8 percent interest earned on deposits, Egypt Post remains the most attractive choice for many Egyptians, and the only option for deposits that fall under the LE 2,500 minimum required by many banks to establish a basic checking account. Egypt Post also conducts transfers of remittances, which remains a key source of income despite decreased employment opportunities in the Gulf and Europe.
The Sharia way
One need that remains unmet by most banks, Egypt Post, and microfinance, is Sharia-compliant finance.
Sanabel’s Abdel-Baki considers Islamic microcredit services a highly desirable product, but acknowledges that sometimes a client’s desire to comply with Islamic finances succumbs to the higher costs associated.
“For much more cost, you don’t get the returns, she continued, “I think this is a problem with design and of thinking too conventionally. If we think outside the box, we could create whole new products.
Consultative Group to Assist the Poor (CGAP) is offering a competition to design Islamic finance products, she explained, saying that “there is huge demand in the region, we just need to work on the cost structure. Otherwise we deprive a huge segment of population who won’t engage in finance unless it is Islamic.
The recent acquisition of the National Bank for Development by the Abu Dhabi Islamic Bank automatically transformed their microcredit services to comply with Islamic banking practices.
The other three Egyptian banks offering microcredit – Banque du Caire, Banque Misr, and Bank of Alexandria – do not comply with Islamic regulations.