Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AfricaApril 3 2018

Bouyant banks shape Egypt's vision for 2030

Egypt’s banks are throwing their weight behind extending financial inclusion to small and micro businesses, as well as the country's wider population as part of the national Vision 2030 strategy, helped by changes to the bankruptcy system and hopes of lower interest rates. James King reports.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
CIB

Egypt’s banks have long played an outsized role within the country's economy. Through the country’s most difficult years, from the financial crisis to the political turmoil of the recent past, the strength of Egypt's banking sector has been a constant source of stability. And this role is unlikely to diminish.

Today, in many ways, the country’s banks help underpin the wholesale transformation of the market in which they operate. As Egypt marches towards the goal of a balanced and diversified economy under the government’s Vision 2030 strategy, its lenders are greasing the wheels of commerce and private enterprise to help it get there.

Banks are also offering profoundly important solutions to the challenge of extending financial services to a market of nearly 100 million people. And they are doing all of this, and more, in a swiftly evolving regulatory environment. Encouragingly, the sector as a whole is shouldering these challenges from a position of strength; capital and liquidity ratios are strong, while profitability and asset quality ratios are generally sound.

Good news on profits

The good news is that profitability is expected to remain robust over the medium term. EFG Hermes, a local financial services group, expects the sector’s return on equity to average about 26% between 2018 and 2020. This follows a strong performance by most of the country’s largest banks in 2017, despite market headwinds including high inflation and a 700 basis points (bps) increase to corridor rates.

Commercial International Bank, the largest private lender in Egypt, saw its full-year net income increase by 25% over the period, with a return on average assets of 2.69% and a return on average equity of 32.5%. Meanwhile, during financial year 2016/17, state-owned National Bank of Egypt – the oldest and largest bank in the country – saw net profits increase by 8% to E£13.4bn ($760m).

Many foreign-owned lenders have also posted strong growth in recent times. National Bank of Kuwait Egypt (NBK Egypt), for instance, saw its full-year standalone net profit increase from E£848.9m to E£1.5bn in 2017. This comes as Egypt continues to attract buy-ins from banks in the wider region. Al Ahli Bank of Kuwait, for example, completed the acquisition of Piraeus Bank’s country unit in November 2015, while in late 2016 Morocco’s Attijariwafa Bank completed the acquisition of Barclays' Egyptian business.

Inflation is coming down. So we need rates to move about another 400 bps so credit can start to flow more easily

Hisham Ezz Al-Arab

Nevertheless, bankers in Egypt are hoping to see an easing of monetary policy in 2018 to support credit growth in the economy. “Lower interest rates are needed now and this will happen naturally. Inflation is coming down. So we need rates to move about another 400 bps so credit can start to flow more easily,” says Hisham Ezz Al-Arab, chairman of Commercial International Bank.

In February, the Central Bank of Egypt (CBE) cut rates by 100bps to 17.75%. Most observers expect a measured process of easing to continue throughout 2018. “Our research division expects to see a further 300bps reduction over the remainder of the year. If that does happen then the stock market should rally as all companies with leverage on their balance sheet will see an [aggregate] 400bps fall in the cost of financing that debt,” says Karim Awad, chief executive of EFG Hermes.

Legal changes

Meanwhile, several regulatory and legislative changes are also easing the business environment for Egyptian banks. In January 2018, the country’s parliament passed its first ever bankruptcy law, a legislative move expected to spur additional foreign and domestic investment.

For Egypt’s banks, the new law will offer new ways to deal with troubled companies by making loan workouts faster and more flexible, according to research from rating agency Moody’s. It will also speed up the liquidation of non-viable companies. Indeed, the new law will help Egyptian banks deal with problem loans more effectively than under the previous bankruptcy system, which dealt with them in the courts on a case-by-case basis.

The Egyptian parliament also passed amended capital markets legislation in February 2018. Among other things, this introduces futures trading, a commodities exchange, a reduction to listing fees and changes to help facilitate sukuk issuance. It is expected to boost Egyptian banks’ debt capital markets business over the long term.

Catering for small businesses

Beyond these legislative changes, the Egyptian Financial Regulatory Authority launched the country’s first movable collateral registry in March 2018. According to Moody’s, this will help banks to make credit decisions and augment their capacity to secure movable collateral including, but not limited to, clients’ machinery and crops. The launch of this registry is a huge step forward in addressing the funding needs of Egypt’s small and medium-sized enterprises (SMEs), which often rely on movable collateral when engaging with financial institutions.

To help improve SMEs’ access to credit, the CBE has enacted a requirement that involves the country’s lenders allocating 20% of their loan portfolios to this segment by 2020. In addition, banks must keep interest rates to 5% for loans to entities that have revenues of between E£1m and E£20m. With SMEs accounting for about 85% of Egypt's gross domestic product and 75% of employment, the measures are an urgent, if problematic, example of regulatory intervention in the economy.

“SMEs are hard to bank. It is a different model but we have put a model in place to service [them]. NBK Egypt is one of the most active banks [in the country] for SMEs. It is part of our strategy that coincides well with the push the regulator is putting on this front,” says Yasser Hassan, managing director of NBK Egypt.

I believe that despite its current status as Egypt’s largest private sector microfinance provider, [Tanmeyah] has just scratched the surface

Karim Awad

According to research from the Oxford Business Group, the central bank has allowed lenders to finance SME loans from their non-interest bearing regulatory reserves. In addition, the CBE launched a new microfinance initiative in May 2017, in an effort to direct about E£30bn to more than 10 million recipients over the next four years.

Under the scheme, eight Egyptian banks will offer subsidised funding to accredited microfinance companies, institutions and non-government organisations working in the financial inclusion area. The programme will be incorporated under the existing SME lending framework, meaning that funds allocated under the initiative will go towards banks’ SME lending targets.

Financial inclusion

The Egyptian government has been pushing hard in recent years to address issues around financial inclusion since banking sector penetration sits at about 30% in a population that is close to 100 million in size. If much of this grey economy can be formalised in the coming years, the impact on the banking sector – and by extension the economy – would be profound.

To address the financial inclusion agenda, some banks and financial institutions have recently launched microfinance ventures. Arab African International Bank (AAIB), for instance, has partnered with the Sanad Fund for micro and small enterprises, part of Germany’s KfW Development Bank, to launch a microfinance unit known as Sandah.

“Financial inclusion is a major twist in the evolution of the Egyptian financial industry,” says Hassan Abdalla, chief executive of AAIB. 

Securing external expertise is an approach that has also been adopted by EFG Hermes. “We opted to acquire an existing microfinance outfit, Tanmeyah, because of its unique level of expertise and business model that we could not have built in house. Tanmeyah has a workforce of more than 2000 with a branch network of 150-plus locations and more than 160,000 clients. Its focus is activity-based lending to micro, small and medium-sized enterprises. I believe that despite its current status as Egypt’s largest private sector microfinance provider, it has just scratched the surface,” says Mr Awad.

Nevertheless, a number of hurdles lie in the way of the government meeting its ambitious financial inclusion goals. These relate primarily to the logistics of providing such a large market with formal financial services, as well as the regulatory dimensions that are underpinning its growth.

“We are interacting with the government and civil society to expedite financial inclusion. But there has to be a regulatory shift that will permit digital rather than paper archiving of documentation, for example, if the country’s financial inclusion goals are going to be met,” says Mr Ezz Al-Arab at Commercial International Bank.

Commercial International Bank is turning to technology, among other measures, to extend financial services to the wider population. This includes the rollout of digital products services, such as its smart wallet proposition, and updated versions of its mobile and online banking platforms. “We have revamped our internet banking and mobile application to make them more user friendly. We are trying to get more customers to use those channels,” says Mr Ezz Al-Arab.

Analysing the data

Commercial International Bank is taking a market lead on the use of data. “Data analytics will play an important role in the bank’s future. And we are building the necessary data infrastructure to figure out how we can extract value [from existing operations] and how can we develop new business in the future,” adds Mr Ezz Al-Arab.

SMEs are hard to bank. It is a different model but we have put a model in place to service [them]

Yasser Hassan

The bank is one of the early adopters of artificial intelligence in Egypt’s banking market and is employing the technology in its credit assessments. “One of the models we are developing is an artificial intelligence model for early warning signals covering credit stress. We are trying to use historical data to build a model that automatically alerts the bank when a credit file is under stress, rather than using a credit officer to go through all the paperwork,” says Mr Ezz Al-Arab.

Innovation and ambition have long been at the heart of Egypt’s leading banks. And beyond digital innovation, these traits are manifesting themselves through the Mostadam initiative. Originally conceived by AAIB, Mostadam is a platform for promoting sustainable finance in Egypt.

“Not long after the 2008 financial crisis we came to understand that banking needs to go beyond the mere making of profit,” says Mr Abdalla. “Mostadam is an Arabic word derived from sustainability. It’s a platform that aims to align the financial industry with the dimensions inherent in the sustainability concept: the environment, society and governance.”

According to AAIB, the initiative has provided capacity-building programmes that have benefited 60% of the Egyptian financial industry. “We have ambitions to turn Mostadam into a global movement, starting from Egypt. The whole idea is to train and develop a new generation of bankers who understand that their industry is not just about numbers but also about value,” says Mr Abdalla.

Optimism prevails

Looking ahead, Egypt’s banks are bullish about their prospects in an economy that is in the throes of a genuine transformation. Armed with innovative new products and services, as well as a commensurate level of ambition, Egyptian lenders are gearing up for a new growth trajectory over the longer term.

This includes the financing of some of the world’s most impressive mega-projects, including the Benban Solar Park, soon to be the largest solar installation anywhere in the world. Occupying a 37-square-kilometre plot near Aswan, the project will generate about 1650 megawatts of electricity when it is completed in 2019.

Such developments will drive Egypt toward the next chapter in its history, a history in which, as always, the country’s banks will be playing a vital role.

Was this article helpful?

Thank you for your feedback!

Read more about:  Africa , Egypt