By: Marina Gamil
Cairo – Mubasher: Going back to the year 2000, very few people in Egypt had mobile phones, with the number of mobile cellular subscriptions per 100 inhabitants at 1.98, according to data by Statista. But with the technological revolution across the world, Egypt has recorded 100.97 million mobile subscribers as of April 2021, with mobile penetration standing at 98.57%, according to the latest indicators released in May by the Ministry of Communications and Information Technology (MCIT).
A high mobile penetration rate even among the unbanked, most of whom are low-income families living in remote and rural areas with limited access to financial services, is encouraging Egypt in its shift to digitalisation and financial technology (FinTech) to bridge the banking gap in underserved areas.
Egypt has put financial inclusion among its top priorities as part of the 2030 Vision goals to support small and medium enterprises (SMEs), formalise the informal sector, raise employment rates, and achieve sustainable economic growth.
“Hence, the government is directing towards cashless society because of its impact on the economy by launching a number of initiatives that will, directly and indirectly, foster the FinTech industry in Egypt,” Mohammed Abdel Aziz Youssef, Chairman and CEO of Dcode Economic & Financial Consulting, told Mubasher.
Through technology, these initiatives aim to tackle supply and demand barriers facing financial inclusion, from regulatory and legal reforms to improving financial literacy through technology.
Youssef added that the private sector also supports the industry with the emergence of accelerators, incubators, and funds, such as Flat6Labs that target innovative and technology-driven startups. Additionally, several companies have emerged to support entrepreneurs to launch and grow their businesses online such as GoDaddy.
“The technology helps in increasing productivity; hence, any rise in the total value will reflect on the gross domestic product (GDP),” the Chairman and CEO of Dcode remarked.
Although face-to-face interactions continue to represent a major part of transactions across several sectors in Egypt, these initiatives have started to reap their benefits with the challenges of the coronavirus (COVID-19) pandemic.
A total of 41.4 million individuals have purchased consumer goods online in Egypt as of January, according to the Digital 2021 report by Hootsuite.
Meanwhile, the country’s e-commerce share of total retail sales stood at 2.5%, and the e-commerce industry is forecast to grow at a rate of 33% annually to around $3 billion by 2022, according to Oxford Business Group (OBG).
Moving Towards Digitalisation
Recognising the importance of digital transformation to advocate for financial inclusion in rural communities and develop a cashless economy, Egypt has offered technology-based policies even before the COVID-19 outbreak, including:
1. Introducing regulations for mobile payments and e-wallets by the Central Bank of Egypt (CBE)
2. Launching the National e-Commerce Strategy in December 2017, in cooperation with the United Nations Conference on Trade and Development (UNCTAD)
3. Launching the Regulatory FinTech Sandbox
4. Establishing the EGP 1 billion Fintech Innovation Fund to finance FinTech startups across the country
5. Launching the prepaid Meeza electronic cards to allow more people, including public sector employees, to deposit and withdraw cash, transfer payments, and repay governmental dues using cashless methods and online point of sale (POS) systems
6. Increasing POS machines, with the central bank financing the distribution of an additional 100,000 machines in 2020
7. The preliminary approval of the Egyptian Parliament on a draft law that would govern the FinTech space
8. The digital transformation of the tax management mechanism
9. Allocating EGP 12.7 billion in the FY 2020/21 budget to gradually digitalise all government services
10. Utilising electronic Know Your Customer (KYC) standards, on which the CBE is currently working to allow people to digitally open accounts without signing documents
These efforts among others helped banks in Egypt expand their services to remote areas more easily through mobile phones.
FinTech and Financial Inclusion in Rural Areas
The number of Egyptians with bank accounts has increased from 9.7% of the total population in 2011 to 14.1% in 2014, and 32.8% in 2017, as per the World Bank latest figures cited by OBG.
However, rural areas, where around half of the Egyptian population lives, have low access to financial services; which makes this rate remains below the 43.5% average in the MENA region.
“The financial inclusion rate in some developing countries like Kenya, China, and India, stands at above 80%. When compared to those countries, Egypt has a low financial inclusion rate and a small number of citizens working in the formal sector, which will affect investors’ evaluation of Egypt’s growth,” the Head of Financial Inclusion at Commercial International Bank (CIB), Amin Khairy, told Mubasher.
The main challenge facing banks in Egypt in expanding their financial services to the low-income segment is the geographical distribution. “It is not easy to open branches in rural areas due to their high costs compared to the low levels of profitability achieved from low-income customers in those areas,” he explained.
To tackle this problem and gradually advance financial inclusion in the country, the CBE is adopting digitalisation and FinTech services across various fields to offer banking services nationwide via mobiles.
Instead of depending on traditional in-person services, 32 of Egypt’s 38 banks have started to provide internet banking services, such as e-wallets, and 28 had been granted mobile banking licenses by the beginning of 2020, as shown by the ‘Egypt Financial Services: COVID-19 Recovery Roadmap’ report released by Oxford Business Group in May.
Given the relative complexity of account opening procedures due to the documents required to verify a customer’s identity and income source, the central bank also began to ease these requirements to allow more people, especially in the informal sector, to open banking accounts.
“To facilitate these procedures, banking accounts began to be opened with a national ID card without the need for the other documents, such as income proof, which impose some impediments namely for informal customers,” the Head of Financial Inclusion at CIB said.
FinTech Education
Financial inclusion is not just about granting money, loans, and financial services to low-income or excluded populations, but it also means raising awareness about digital financial services and help people establish credit history through digital services.
One of the critical barriers that could hinder the FinTech industry growth in Egyptian rural areas is illiteracy.
Egypt’s illiteracy rate recorded 24.6% in July 2019, with rural areas scoring a higher rate of 32.2% compared to 17.7% in urban areas, according to the Central Agency for Public Mobilization and Statistics (CAPMAS).
To tackle this issue, banks are increasingly cooperating with e-payment platforms in Egypt, including Fawry, Aman, and Masary, which have wide geographical distribution across most of the Egyptian governorates, to sell their products such as e-wallets.
“These platforms are also working on raising awareness about the importance of these digital banking services and account opening among populations in rural areas,” Khairy added.
Risk Management
Low-income people are usually excluded from formal financial institutions and tend to depend on informal entities for lending since they usually do not have sufficient conventional forms of collateral such as physical assets and income proof.
“The second problem facing financial inclusion in rural and remote areas is banks’ lending and credit risk management, which requests documents such as income proof to evaluate customers and their ability to repay loans. Since most of the people in those areas work in the informal economy and do not have income proof, it is difficult for them to get loans, develop their projects, and enhance their livelihoods,” Khairy explained.
So only certain categories can benefit only from bank loans due to their high-risk management system.
As part of its digital transformation, the country is seeking to use alternative data in the upcoming period to evaluate customer behaviour by depending on certain applications and e-wallets with various services for low-income people to continuously use, Khairy remarked.
Instead of requesting income proof, the banking system will use the collected data from these apps to analyse customers’ performance and assess their ability to repay loans to help them obtain finances, grow their projects and raise their income.
Economic Impact
Egypt’s informal economy poses a great challenge for the government as it represents between 40% and 60% of the overall economic activity and is not regulated or protected by the country and remains outside the taxation system.
Including small businesses and independent workers, the informal economy is estimated to be worth about $154 billion, accounting for roughly 40% of Egypt’s GDP.
Egypt aims to cope with the global trend of shifting towards a cashless economy, allowing better management of payment activities across different segments and a move from the informal to the formal economy.
“When the number of individuals putting their money in banks increases, the CBE Monetary Policy will be affected, and the country will be able to better control liquidity and help more citizens gather savings and secure loans to grow their business and hire more people,” said the Head of Financial Inclusion at CIB.
Khairy says that Egypt’s economy will grow when more individuals enter the formal sector, which would result in reducing unemployment rates and attracting more investors.
As for the other impacts of FinTech on the country’s economic growth, the International Monetary Fund (IMF) referred in its working paper published in June under the title “Is Digital Financial Inclusion Unlocking Growth?” that enhancing digital financial inclusion to the 75th percentile would lead to a 2-3% rise in GDP growth on average.
In addition, each Egyptian pound invested in FinTech generates nearly EGP 1.6 for Egypt's GDP, according to the economic bulletin published by the National Bank of Egypt (NBE) in June 2019.
Expected Boom in Financial Inclusion Rates
“The financial inclusion rate in Egypt reached 54%, according to what the CBE communicated to us in May. I expect that we would witness a boom in the financial inclusion rate in Egypt and achieve a rate of around 80% in the coming three to five years like India, China, and Kenya,” Khairy said.
Besides the policies and initiatives taken in this regard, developing infrastructure is essential to accomplish this objective. "Banks are cooperating with the Ministry of Planning in the 'Hayat Karima' [Decent Life] Presidential Initiative to support people in rural areas,” Khairy further noted.
Launched by Egyptian President Abdel Fattah El-Sisi in 2019, the ‘Decent Life’ initiative aims to improve the quality of life in the neediest local communities within the framework of Egypt’s Vision 2030 by decreasing poverty and unemployment rates.
One of the main pillars of the initiative is enhancing the infrastructure in the poorest villages, expanding roads, sewage projects, electricity and power grids, as well as internet and broadband services.
“With internet connectivity and affordable smartphone penetration, alongside the CBE’s policies for lending and accounts opening, and the efforts of private companies in this trend, we will depend on digitalisation to reach more customers and see a boom in financial inclusion rates,” Khairy noted.
Therefore, integrating digitalisation in Egypt’s banking system to reach more people, especially in rural communities, could foster the future of financial inclusion in the country and help grow the formal economy.
