The strong economy in Egypt has attracted increased interest from foreign lenders, with new digital finance regulations unleashing a fintech boom. Kit Gillet reports.
The pandemic hit different countries in different ways. In Egypt, the economy continued to expand, even during the dark days of 2020, with the banking sector playing an important role in supporting businesses and the economy in general.
The Egyptian banking sector has continued to serve as a main driver of economic progress, providing stability and resilience in the face of global and regional crises, says Mohamed Aly, chief executive and managing director of Abu Dhabi Islamic Bank (ADIB)-Egypt. “Banks helped fuel Egypt’s economic growth amid the pandemic; the overall credit to the government, state-owned businesses, the private sector and households increased by 11.8% from fiscal year 2019/20 to 2020/21,” he adds.
Restructured and stronger
According to Constantinos Kypreos, senior vice-president at Moody’s Investors Service, Egyptian banks entered the pandemic in relatively good shape, following a multi-year restructuring of the banking sector. “This included the recapitalisation of state-owned banks, a clean-up of legacy non-performing loans (NPLs), as well as implementation of more effective supervision and new regulations,” he says. “In addition to the banking sector reforms, authorities have also implemented structural reforms, for example the flotation of the Egyptian currency back in November 2016.”
Mr Kypreos says that the past two years has seen a resilient performance from the Egyptian banking sector. “Contrary to our expectations, there hasn’t been any increase in NPLs. The capital buffers have increased. Profitability hasn’t been too much impacted, and the banks remain deposit-funded and liquid.”
In an update on the Egyptian banking sector in February, Moody’s said that it now expects real gross domestic product (GDP) growth of 5.5% for the fiscal year 2022, aided by infrastructure investments, a rebound in tourism and solid household spending, which will lead to credit growth of around 20%.
“During the pandemic, demand for credit was more for working capital,” says Mr Kypreos. “Post-pandemic, and as the economy expands, the requirement will be for both working capital and investment spending.”
And while NPLs will increase moderately as coronavirus support measures are wound down, lending growth will leave the NPL ratio broadly stable at 4%, Moody’s predicted.
Pandemic response
Like central banks around the world, in the early months of the pandemic the Central Bank of Egypt (CBE) pushed through support measures aimed at assisting the domestic economy. These included a deferral of bank loan payments for individuals and corporations; E£100bn ($6.36bn) worth of lending, via banks, to targeted economic sectors at an annual interest rate of 8%; and, later, a ban on banks distributing profits to shareholders.
In 2020, the central bank also cut interest rates by a cumulative 400 basis points; despite some suggestions that the rates could rise, the central bank has continued to keep its overnight interest rates at 8.25% and the lending rate at 9.25% as of February.
“As long as inflation is under the central bank’s target [of 7%], we do not expect to see changes,” says Monsef Morsy, head of financial analysis at CI Capital in Cairo. “So far, inflation is around 7%. Global inflation will have a big part when it comes to the potential direction of the CBE,” he adds.
Looking ahead
The banking sector’s strong foundation leading into the pandemic — as well as central bank support measures — enabled it to expand across key metrics over the past two years. Annual total deposits growth reached 19.7% year-on-year in June 2021, of which 92% came from the private sector, says Hussein Abaza, chief executive of Commercial International Bank, a listed lender and the biggest private-sector bank in Egypt.
Meanwhile, “the annual growth rate of total lending by the banking sector increased by 17.7% in June 2021, compared to 7.6% in the same period of 2020,” he says.
The pandemic has also greatly boosted reliance on digital solutions — a promising trend for the banking sector’s outlook
Capital buffers have also been improving, with the common equity Tier 1 ratio at 13.1% in September 2021, up from 9.2% in 2017, and deposits accounting for 71% of banking sector assets as of September, with around 19% of assets held as cash. This has placed the Egyptian banking sector in a strong position to handle any new crises.
“The pandemic has also greatly boosted reliance on digital solutions — a promising trend for the banking sector’s outlook,” says Mr Abaza.
Land of opportunities
Many see plenty of opportunity when it comes to the banking sector in Egypt, especially given the fact that around two-thirds of Egypt’s population of more than 100 million remains unbanked.
“The Egyptian banking system is both under-penetrated and underbanked,” says Mr Kypreos, who points out that financial inclusion is low, with less than 50% of the adult population having a bank account. “Private-sector credit as a percentage of GDP is also quite low, at around 30%, whereas the global average is over 100%,” he adds.
However, “there’s a lot of growth potential in all areas, and this comes from the use of new technologies, mobile accounts, electronic payment platforms and the new prepaid ‘Meeza’ cards that allow Egyptians to deposit and withdraw cash, transfer payments and pay government fees. All of that can support deepening financial inclusion,” he says.
Like in much of the world, the pandemic has expedited the shift towards digital technologies and fintech solutions; Egypt’s mobile payments industry is expected to grow by around 20% a year over the next few years.
Initiatives by the central bank to provide incentives for banks to increase lending to small and medium-sized enterprises (SMEs), as well as other industrial sectors, have also been important. In 2021, the central bank increased the amount of lending that banks need to allocate towards Egypt’s SMEs, raising the amount from 20% of total loan books to at least 25%, with the target needing to be reached by December 2022.
“Combined with the strong economic growth and large infrastructure projects, all of these initiatives suggest that there’s a lot of growth potential in the market,” says Mr Kypreos.
New regulations
In 2020, for the first time in almost two decades, Egyptian authorities put in place new banking sector regulations, with the regulations requiring, among other things, that local banks maintain capital of E£5bn, up from E£500m under the previous legislation.
The regulations also addressed cashless payments, digital banks, e-money and cryptocurrency for the first time, as well as outlined requirements needed to safeguard the interest of employees and customers when banking sector mergers take place.
In September 2021, Egypt’s central bank also approved contactless payments through mobile phones.
“Since its onset, the Covid-19 pandemic caused significant policy and regulatory changes, and accelerated digitalisation trends that were already underway prior to the crisis,” says CIB’s Mr Abaza. “The high mobile penetration rate, even among the unbanked, is encouraging Egypt in its shift towards the utilisation of fintech to bridge the banking gap in underserved areas.”
Mr Abaza adds that a substantial number of important developments have taken place over the past few years that could help further this transition in Egypt, including the introduction of regulations for mobile payments and e-wallets, the launch of the regulatory fintech sandbox, the establishment of a E£1bn Fintech Innovation Fund to finance fintech start-ups, as well as the launch of the Meeza cards.
In addition, while executive regulations have yet to be issued, 2021 also saw several banks applying for digital banking licences in Egypt, he says.
Shaking up the sector
Egypt’s population makes it an attractive proposition for many foreign banks looking to expand abroad, as does the country’s large unbanked population.
However, acquiring a banking licence in Egypt is notoriously difficult, with the CBE no longer issuing new licences, meaning that those looking to enter the market must do so through the acquisition or merger with an already-existing bank.
Prominent banks from across the Middle East — notably Emirates NBD, First Abu Dhabi Bank (FAB), ADIB and Abu Dhabi Commercial Bank — have all turned their attention to Egypt in recent years.
Some have benefited from the financial turmoil in Lebanon, which has left many Lebanese banks needing to sell off their Egyptian subsidiaries, with Bahrain-based Bank ABC acquiring Blom Bank for $480m in January 2021 and FAB receiving regulatory approval to acquire the Egyptian operations of Lebanon’s Bank Audi last April. Bahrain-based Ahli United Bank also increased its stake in Ahli United Egypt to 95.7% in October 2020.
The new capital requirements could lead to further mergers and acquisitions.
In February, FAB also made a non-binding offer to buy a majority stake in EFG Hermes, Egypt’s largest investment bank, at a valuation of almost $1.2bn. The deal, conditional upon the completion of a due diligence and required regulatory approvals, would be a further sign of confidence from outside financial services providers regarding the Egyptian market.
At the same time, in January it was reported that Standard Chartered Bank was poised to establish a full-fledged banking operation in Egypt, an upgrade on its current representative office, after obtaining in-principle approval from the CBE.
Cause for concern
Looking ahead, however, there are some potentially dark clouds on the horizon.
In January, Fitch Ratings said that Egyptian banks’ viability ratings could come under pressure if the banks’ foreign assets continue to drop, with the sector having a net foreign liabilities position of E£112bn as of end-November 2021, compared with a net foreign assets position of E£107bn at end-February 2021. “The deterioration was mainly driven by declining foreign assets,” the ratings agency concluded.
The CBE’s official foreign currency reserves strengthened to $40bn at end-November 2021, up from $37bn at end-June 2020. This was supported by the return of non-resident investments, as well the issuance of a $3bn Eurobond and $3bn in special drawing rights allocated by the International Monetary Fund in August 2021.
Egyptian banks also continue to be heavily invested in government securities, which account for around 34% of total banking sector assets.
“I think it is manageable; we don’t expect a shock,” says CI Capital’s Mr Morsy, referring to the heavy reliance on government securities. “For banks, it’s an important source of interest, income and profitability. The expectation going forward is that, in the short term, yields on the treasury securities market might go up. Accordingly, banks will benefit,” he adds.
Even so, in February, Moody’s predicted return on assets for the Egyptian banking sector in the range of 1.0–1.2% for 2022, impacted by income from government securities now being subject to withholding and corporation taxes.
Islamic finance lagging
Despite its sizeable Muslim population, Islamic finance has yet to really take off in Egypt. The country has just three dedicated Islamic banks, as well as 11 banks operating sharia-compliant windows in addition to their traditional operations. Still, the opportunities are clearly there.
“It’s not as developed as in other countries, but the potential is there as Egypt has a predominantly Muslim population,” says Moody’s Mr Kypreos, adding that Egyptian authorities have put in place efforts to support the sukuk market, in terms of capital market initiatives and sharia boards to oversee issuances. “We do expect the volume of sukuks to increase in the coming years,” he says.
According to ADIB-Egypt’s Mr Aly, the regulatory environment for Islamic banking in Egypt is set to witness significant steps that will help to redefine the reach and share of Islamic banking in the country. “The massive, game-changing opportunity for all Islamic banks will be passing the law allowing the government and private sector to issue Sukuk to fund specific projects, which would tremendously expand the role ADIB plays in supporting Egypt’s economic prospects,” he says.
“We are also seeing more interest from SMEs and microenterprises who want to capitalise on Islamic financing’s unique funding models,” Mr Aly adds. “Our portfolio, by the end of 2021, is 83% higher than in 2020 and outpacing the SME financing market as a whole, which grew by 71% throughout last year.”
Young and underbanked
Looking to the future, those involved in the Egyptian banking sector see strong growth potential, aided by increased investments, heightened demand for credit and Egypt’s population demographics.
“It is hard to overstate the extent of long-term and sustainable opportunities available in Egypt,” says Mr Aly. “You need only look at the diverse slew of investment opportunities; the young, fast-growing population; and the entrepreneurship ecosystem to see investment options. Egypt is still primarily an underserved market, further adding to its appeal.”
