Egypt has been supporting digital transformation and innovation to enhance the economy. As a way to digitalize its banking system, the Central Bank of Egypt (CBE) issued rules in July for licensing, registering, monitoring, and supervising digital banks. This comes as digital banking enables customers the flexibility to access their banking services anytime, anywhere. As the CBE licenses it, the digital banking sector comes with opportunities and challenges that need to be faced.

Digital Banking: An Emerging Trend

Digital banks can sometimes be confused with online banking; however, they are different.

"Banks engaged in digital banking are deposit-taking institutions that are members of a deposit insurance scheme and deliver banking services primarily through electronic channels instead of physical branches," according to the Bank for International Settlements (BIS).

Digital banks are virtual financial institutions that offer online banking services, from online payment processing and e-commerce services to fully digitized banking experiences. They provide complete end-to-end digital banking without any physical presence or interaction with a human person.

Accordingly, digital banking has become a global trend following the COVID-19 pandemic. This comes as customers prefer to reduce direct contact with branches and tend to save time using digital services.

Licensing Process and Attracting Investors

This way, digital banks have become a necessity to cope with the age’s needs. Hence, in September 2020, the CBE issued the new banking law and has been planning to release the framework for the digital banking licenses. The CBE announced on July 12th a set of requirements for institutions and banks that want to obtain a license for digital banking in Egypt.

The requirements include minimum capital requirements, governance, and risk management standards. Digital banks will operate entirely online, allowing customers to open accounts, apply for loans, and conduct transactions through their mobile devices or computers. As per the requirement, digital banks shall have issued and paid-up capital of at least EGP 2 billion. In case of financing large companies, the capital should increase to EGP 4 billion. Moreover, the majority shareholder must be a financial institution with ownership of not less than 30% of the total capital, and it must have previous experience in similar activities.

When it comes to investments in digital banking, several companies, including Fawry and eFinance, showed interest in applying for a digital banking license. Mostafa Taher, Senior SMEs Relationship Manager, tells Arab Finance that the five banks and financial institutions that have announced their interest in digital banking so far are Egyptian. He also adds that attracting the international side to collaborate with the Egyptian banking institutions is needed, especially since the capital assigned in the CBE’s requirement is very small in comparison to the exchange rate. Taher explains that investors would need to see whether it can compete in Egypt before injecting capital to test the CBE’s control and infrastructure and to see if there is real competition.

Digital Banking: Opportunities vs. Challenges

In a statement published in July, Mohamed El-Etreby, Chairman of the Board of Directors of Banque Misr, highlighted that CBE’s decision to issue rules for licensing and registering digital banks, as well as for monitoring and supervising them, is an excellent step towards enhancing financial inclusion and building a competitive digital economy.

This is aligned with the implementation of Egypt’s digital strategy, the expansion of financial technology, and the use of digital solutions in providing financial services.

Digital banking can offer an opportunity for investors. Taher says: “The investor who comes from abroad has a very big opportunity since about 60% of the age group from 16 years and above, who are authorized to have a bank account, have their accounts open in Egypt, with 40% having no access. This means that the foreign investor will have a great opportunity because there is still almost 40% of the market with no banking access.”

When it comes to challenges, Taher refers to infrastructure: “Egypt has already started working on the digital infrastructure. We used to have a minor issue with the internet speed. Therefore, the Ministry of Telecommunication has started fiber optic lines and is working on the Tiba satellite because some border cities do not have internet yet and some governorates do not have fiber optics. In order to start digital banking, the country should have full-speed internet. The ministry is working on that in parallel, but it does not mean we have reached the end of the line yet. However, if we look back at 2015, the internet speed has greatly improved.”

Taher says: “Artificial Intelligence (AI) will be able to judge the eligibility of a credit/loan seeker if we provide enough input to enable accurate data. If we look at the most famous countries adopting credit rating scores, China and the USA, we will find that in the US, for example, your credit rating is your life; everything is connected to it. Here in Egypt, I am working in finance, where the I-Score is crucial to knowing the client’s commitment to previous loans. But what if this client did not have a loan before? The credit rating system should be connected to many things together, such as taxes and commitment to telephone and utility bill payments in time.” He explains that for digital banking to work, we need to have a wider data base than just the I Score system.

What can also be challenging in digital banking are cyberattacks. Therefore, in order to ensure the success of digital banking, the CBE's requirements to issue a digital bank license include having general plans for payment systems, information technology, and cybersecurity.

The licensing of digital banks in Egypt is a significant step towards promoting financial inclusion and accelerating the move towards a cashless economy. Digital banks will offer a range of innovative services and assist a wide range of customers, including those who are unbanked or underbanked. While they offer several advantages over traditional banks, they may also face some challenges.


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