Experts weigh in on recent and upcoming policy shifts in Egypt's bid to go cashless and inclusive

Moody's Investor Services estimates that SME clients make up just five to 10 per cent of Egyptian banks' lending; this despite the fact that SMEs with 10 or fewer employees account for 97 per cent of businesses and 75 per cent of employment in Egypt, according to the World Bank and the African 
Economic Outlook.

While SME lending is considered risky across markets, one major, unavoidable barrier in Egypt is a cash-heavy culture that leaves many of these businesses in the 'informal' or unbanked economy.

The Center for International Private Enterprise (CIPE), an affiliate of the US Chamber of Commerce, along with the Federation of Egyptian Banks and the Federation of Egyptian Industries, recently issued a report on the challenges Egypt has faced in realising a cashless economy.

Randa Zoghbi, Country Director of the Egypt Office for CIPE, said that most of all, the report's research demonstrates the significant problems with the Egyptian legal framework.

"The legal framework suffers from major deficiencies in several critical provisions that are key to Egypt's transition to a cashless economy. As shown, in most cases, the law does not obligate the Government or a bank to use specific payment methods in their transactions, whatever the nature of the transactions is. In fact, some provisions explicitly mandate the use of cash payments to the concerned entity's treasury," she said.

"Yet, on the positive side, Egypt's demographics, with youth comprising the majority of the population, and the prevalence of internet use, have sparked numerous initiatives that rely on modern technologies, all of which contribute to transitioning to a cashless economy," Zoghbi added.

Roadblocks to going cash free

Hands down the most commonly- cited problem in going cashless is the massive informal sector, but its continued existence says a lot about the hurdles standing in many business owners' way. Report contributors gave a dozen reasons for the challenges that business and banks face.

"One thing will not do the trick," Tarek Tawfik, Vice Chairman of the Federation of Egyptian Industries (FEI), said. "Number one [in bringing informal businesses in] will be the ease of doing business--the registration of properties, land allocation, licences being given by the government--which is very cumbersome and one of the reasons that SMEs veer outside the formal economy."

Tawfik said that the FEI, which counts more than 65,000 Egyptian businesses in its community, has been working aggressively with the government to streamline these operations and introduce a bankruptcy law. It is also working in tandem with the Federation of Banks to lobby for reforms and updates to some 11 or 12 laws related to banking and business, he said.

Zoghbi said that besides the informal economy, factors from low financial inclusion to high rates of corruption and tax evasion hinder a shift towards cashless transactions.

However there are some ways that Egypt's shift towards digital diverges from other countries' paths. While the general trend in digital banking means abandoning brick-and-mortar branches, in Egypt some level of bank presence is still key to bringing people into the financial fold.

"Shortage in ATMs is considered the primary barrier preventing many from setting up bank accounts, and more so, it is expected to pose a significant challenge to Egypt's shift to a cashless economy," Zoghbi said. She estimates that there are 40 banks in Egypt but "insufficient competition, insufficient network of branches" and an ATM shortage in rural areas are holding the sector back. In many ways, financial inclusion requires classic bank presence.

This may go a long way in breaking down cultural hesitation that Zoghbi also mentions.

"Some firmly held beliefs and habits in the Egyptian society constitute a challenge that could hamper the move to a cashless economy," she said. "For example, a firm belief regarding difficulties in interacting with the banking sector, a strong preference for relying on cash saved at home, doubts and questioning of the conformity of banking transactions with Shari'ah, and reluctance to disclose financial or personal information are among the key cultural factors contributing to the prevailing cash culture."

Banking on 
cashless growth

On 11 January 2016, the Central Bank of Egypt made headlines with a new directive that banks allocate 20 per cent of their loan books to SMEs. Though several rating agencies warned that the strategy shift could put pressure in the quality of some banks' loan books, the initiative was largely welcomed as an impetus to bring Egypt's significant small business owner population into the 
formal economy.

Asked about the new policy, Tawfik said, "It's a nice initiative but it will not materials until we reform the 'doing business' aspect. It's nice to have money at a low interest rate but if you're not able to get into the formal sector you'll not get the benefits of it."

One additional reform in Tawfik's book would be an overhaul of the archiving system; many Egyptian banks still rely on paper records. "Adopting an electronic archiving system within the banking system would dramatically reduce the cost of opening a bank account for a small individual because I think we have to keep records up to five years, some cases 10 years," he said.

Zoghbi also highlighted banks' lack of digital infrastructure. The report found that many banks lacked up-to-date database infrastructure in particular, but also the physical infrastructure that allowed for banks to perform basic services across the country.

"In the absence of banks and ATMs in many rural places, postal service offices are essentially filling the gaps in financial services coverage. So these services are not accessible to everyone in Egypt," Zoghbi said.

New transaction channels

On a consumer level, both Zoghbi and Tawfik pointed to the possibilities mobile banking held. In the report, Kenya was cited as an example of the mobile potential.

"We're seeing a trend towards mobile banking transactions. There is a good reach--in Egypt, there are more mobile phones than the existing population. We have almost 100 million cell lines for a population of 90 million," Tawfik said. "I think the phone companies have been taking the lead in this direction along with the industries."

Though mobile banking in the Kenyan model often relies on SMS or airtime transactions, increased smartphone usage could deepen the level of financial services offered remotely.

"Nowadays the number of people using smartphones is progressively increasing; the high penetration of smartphones in Egypt will allow more and more people from all social classes to use digital transactions to make payments and transfer funds," Zoghbi said.

Policy reform on 
the horizon

Many of the reports' recommendations are already underway. Ease of business reforms, including business licencing, are in Parliament discussion, while the SME initiative launched earlier this year has moved banks into action. Tawfik added that the Federation of Industry is now pushing aggressively to amend the investment law, while the bankruptcy law has been made a priority by the Minister of Investment.

"I think the country is going through a necessary transition," he said. "We have been encumbered by a pile of bureaucracy that has built up over the past 60 years. There is a real will in trying to reform the system, but unfortunately it doesn't come at the click of a button."

Increasingly, rumours of significant monetary policy reform have also swirled. In May, Renaissance Capital released a report suggesting that the Central Bank could look at floating the Egyptian pound. Earlier this month, CBE Governor Tarek Amer seemed to confirm this when he called the five-year peg of the currency 'a grave mistake'.

"Coming right out and announcing that, I think it's a prelude to a move that will come very soon," Tawfik said. "We've been hearing some hints that there is a serious appetite for reform in the monetary system...I think these issues, once they come into place, will put us on the right track."

The report by the CIPE and the two federations recommended several policy approaches, but on the questions of what Egyptian banks can do themselves, Zoghbi highlighted a need for minimal account opening deposit requirements and fees, and again, the promotion of banking through increased branches and ATMs. She added that on a policy level, permitting the establishment of more private banks could help.

"These, all together, work towards improving financial inclusion and facilitating the transformation to a cashless economy.

"If the appropriate bodies were to follow the recommendations provided, the general timeline for Egypt to achieve its goals is from two to seven years. The changes will be gradual because there are many stakeholders involved, and the pace of reforms differ from one to another," Zoghbi said.

© Banker Africa 2016