Egypt’s financial leasing sector hit by inflation and high-interest rates

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Egypt’s inflation and high-interest rates have led to a decline in the expansion of investment companies. The cost of financing economic activities has increased, and the economic feasibility of many projects has decreased. As a result, investors are resorting to vessels with a fixed return that are free of risks.

To curb inflation, which hit record levels, reaching about 40.3% last May, the Central Bank of Egypt raised the interest rate by 10% during the last 15 months, including 8% last year and 2% in March.

The current economic conditions have affected Egypt’s financial leasing sector, similar to other sectors. The number of financial leasing contracts has declined, and customers are retaining cash liquidity due to the decrease in assets available for financial leasing. This decrease is due to some obstacles, such as the import crisis.

During the first quarter of this year, the number of financial leasing contracts in Egypt decreased by nearly 50% to reach 507 contracts, compared to 994 contracts during the first quarter of 2022. However, the value of financial leasing contracts increased during the same period to reach about EGP 28.1bn, compared to EGP 21.8bn during the comparative period.

Looking at March alone, the Financial Regulatory Authority (FRA) report indicated that the total value of contracts declined to EGP 7.02bn, compared to EGP 10.4bn in March 2022, a decrease of 32.6%.

Furthermore, the number of financial lease contracts decreased during March 2022 by 50.3%, reaching 157 contracts compared to 316 contracts in March of the same year.

Aladdin El-Afifi, CEO of the non-bank financing sector at EFG Finance, stated that each non-bank financial activity has different dimensions and is affected by economic repercussions in a unique way.

He added that factoring is less severely affected, but with the cessation of imports, financial leasing activity is impacted. The impact on real estate financing has been prolonged, leading to a decline in real estate as an investment tool at present, particularly with the difficulty of liquidation. On the other hand, microfinance and consumer financing activities are still reaping the benefits of high inflation.

El-Afifi explained that current market conditions necessitate a risk-focused approach, with diligence being an integral part of striving for growth in all financial activities offered by the company. This is necessary to maintain the quality of the portfolio for each activity, with the need for periodic follow-up after granting financing without exaggerating required procedures. He stressed that the challenges have driven the need for innovative solutions.

Mowafak Gamea, CEO and Managing Director of Arab African International Leasing (AAIL), stated that all non-banking financial activities were affected by the interest rate hike and experienced a slowdown in growth due to the interest rate and global inflation. However, companies’ needs govern the market.

He added that companies encounter obstacles in obtaining assets for production. Some customers avoid expanding production through financial leasing, hoping that benefits will decrease and inflation conditions will improve.

Gamea explained that Egypt’s financial leasing companies are negatively affected by the lack of assets available for leasing. The import crisis, especially with cars, equipment, transportation equipment, production lines, machinery, and medical devices, led to a decline in available assets.

He pointed out that the majority of growth in the sector came from real estate assets due to the lack of availability of assets for financial leasing, as they represent the highest share of activity.

According to a report issued by Egypt’s Financial Regulatory Authority, real estate and land activities accounted for the largest share of the value of financial leasing contracts during the first quarter of this year, reaching about EGP 25.6bn or 91.18% of the total value of contracts, due to the large size of this sector compared to others.

Gamea expects financial leasing to begin recovering from the consequences of inflation and high-interest rates during the second quarter of this year. This is especially significant given the good condition of the sector’s financing in May and June, and the expectation that demand for financial leasing from companies will continue to increase in the coming period.

The transport vehicles activity accounted for 2.95% of the total value of contracts, with an estimated value of EGP 0.8bn, during the first three months of this year, while the machinery and equipment activity recorded a value of contracts amounting to about EGP 0.7bn, or 2.36% of the total value of contracts.

Private cars account for a market share of 1.07% of total activity, amounting to EGP 300m. Production lines follow with a rate of 0.32% and an amount of EGP 89m during the same period.

Customers obtained financing from companies in the amount of EGP 2m to rent office equipment, which has a market share of 0.01%. Other activities have a market share of 0.94%, amounting to EGP 264m.

Iman Ismail, CEO of Egylease for financial leasing, stated that the financial leasing sector reflects the consequences of inflation and highlights the extent of companies’ vulnerability to local economic conditions.

She explained that the sector provides necessary financing to help other sectors, and just like the productive sectors, it is affected by inflation and the raising of interest rates.

Although the number of contracts decreased by 50%, reflecting the impact of the sector, the value of contracts increased, which also reflects the increase in cost.

Ismail noted that despite the repercussions, the market is expanding significantly, and the sector supports financial inclusion plans, attracting more customers with smaller amounts in the sector.