Egyptian policymakers are facing a significant challenge: how to address acute economic challenges while managing ongoing political and social transitions. Output in major sectors of the economy (construction, trade, and tourism) remain weak while foreign direct investment (FDI), once a core tenant of Egyptian growth, reached nearly zero in the second quarter of this year. The Egyptian unemployment rate, which traditionally hovered around 9.5 percent in the years preceding the revolution, has increased to 13.2 percent in the first quarter of 2013 (World Bank 2013).
One area of renewed interest amongst policymakers and financial service providers is that of promoting financial inclusion - defined as a state in which all individuals and businesses have access to and use of appropriate financial services (including loans, savings, credit, insurance, and money transfer systems), responsibly provided by institutions permitted to offer such services.
Promoting financial inclusion can help expand private sector activity, and address economic challenges in Egypt. At the microeconomic level, access to and use of appropriate financial services improve household welfare and spur household enterprise activity. Financial inclusion can also help address joblessness because it helps grow enterprises, many of whom are stifled by lack of access to credit and savings services. Financial inclusion also has significant impact on macroeconomic stability. Recent evidence (Han, Rui, and Melecky, 2013) demonstrates that broader access to and use of bank deposits can significantly mitigate bank deposit withdrawals or growth slowdowns in times of financial stress.
Unfortunately, however, Egypt has one of the lowest levels of financial inclusion in the Middle East and North Africa (MENA) region (See Figure 1). According to Findex data, only 10 percent of Egyptian adults have access to formal financial services and fewer than 4 percent of Egyptian adults took a loan from a financial institution in the past year. By ways of comparison, on average 24 percent of adults in low income countries have accounts at formal financial institutions. Although Egypt boasts one of the largest microfinance markets in the Arab World in terms of client outreach, the sector is estimated to be reaching only 8 percent of its potential.
Figure 1: Low Levels of Financial Inclusion in MENA
A recent roundtable held in Cairo, organized jointly by the World Bank, The Consultative Group to Assist the Poor (CGAP), the Social Fund for Development (SFD), and the German Development Cooperation (GIZ), provided an important opportunity to discuss important regulatory changes and market investments that are working to enhance financial inclusion in Egypt. This event was attended by main stakeholders—the Central Bank of Egypt (CBE), the Egyptian Financial Supervisory Authority (EFSA), Egypt Post, microfinance institutions (MFIs)/nongovernmental organizations (NGOs), and banks.
Through assistance from the World Bank-IFC MSME Technical Assistance Facility, work has begun on drafting a new microfinance law in order to address key regulatory gaps, including allowing microfinance institutions, the majority of which currently operate as NGOs, to own companies. This opportunity will increase the ability of MFIs to operate sustainably through greater leverage and diversification of their funding base. The World Bank is providing legal analysis and coordination support to SFD and EFSA, key actors involved in the development of the new law.
Similarly, new providers are beginning to enter the market for financial services to the poor. Egypt Post, which is under new leadership, has reinvigorated its commitment to establish the “bank for the poor” by providing important savings services, payments, and insurance. It is also looking to expand linkages with MFIs for cash-in and cash-out functions for loan disbursement and collection at its more than 3,000 branches across the country. The World Bank is providing technical guidance to Egypt Post as it develops new products and looks to scale up partnerships with other financial service providers.
At the macro level, CBE has initiated a working group led by the Egyptian Banking Institute on developing a financial inclusion strategy, examining what policies and activities are needed to help coordinate both private (financial service providers) and public actors (regulators) promote financial inclusion within their respective mandates. This is welcome news given President Jim Kim’s new global initiative to provide universal financial access to all working-age adults by 2020. The CBE’s work also reflects a trend whereby Central Banks across MENA have begun taking a more active interest in leading financial stability and inclusion efforts.
Together, these initiatives signal that financial inclusion is emerging as an important avenue through which to promote economic stability and spur private-sector investment in Egypt, particularly as political and social transitions continue. The World Bank is heartened to see the recent progress on financial inclusion in Egypt, and is ready to continue assisting the financial sector as it moves forward on providing access to financial services to all Egyptians.