On the currency flotation, increasing financial inclusion and incentivising credit growth What impact has the currency flotation had on the banking sector, and what can we expect for 2018?
EL SALAWY: The flotation of the pound was a very bold decision. The Egyptian economy has a strong demographic base; however, GDP growth has been sluggish in recent years leaving significant untapped potential. Egypt’s strong commitment to liberalising reforms is encouraging a more open economy and has been long awaited by the private sector and global investors.
The flotation has resulted in increased market confidence and a new wave of foreign investment. The country is becoming more affordable with greater promise, particularly given the growth-friendly investment climate.
At the heart of this changing landscape has been the banking sector, which is generally regarded as healthy and well capitalised, due in part to its deposit-based funding structure and ample liquidity. Benefitting from the nation’s increasing economic stability over the past year, the sector has enjoyed both ratings upgrades and continued profitability. Furthermore, economic reform and new investment legislation have seen the project finance pipeline recover after a period of lower activity, while increased bank competition is serving a largely untapped retail segment and the nation’s challenging but potentially rewarding small and medium-sized enterprise (SME) segment.
Given the new market dynamics and wealth of untapped opportunities, 2018 will continue to observe enhanced performance and stability in both the banking sector and the economy overall.
How has the push to increase SME lending affected operations of commercial lenders?
EL SALAWY: Over the last two years, the Central Bank of Egypt has launched a number of subsidised funding initiatives aimed at SMEs, while mandating that this sector should make up no less than 20% of bank lending portfolios by the end of 2019. As a result, we have witnessed increased attention to this underserved market. As for credit quality, having clear prospecting and underwriting policies and a well-defined risk appetite will ensure the rate of non-performing loans is kept under control. Despite the sizeable growth we have seen so far, portfolio performance remains quite satisfactory.
To what extent is new technology increasing financial inclusion and which services are most effective?
EL SALAWY: Digital payments have been the most effective new technology in supporting financial inclusion. Newly launched mobile wallet services in particular are offering a very promising future in targeting and acquiring unbanked customers. The success of mobile wallets is expected to reflect positively on the economy by bringing a new source of funds into the monetary system, thereby building a target level of efficiencies for both the financial system and the customer. Mobile wallet services provide users with an additional payment option that enables them to enjoy services such as mobile top-ups, bill payments, peer-to-peer and peer-to-merchant services, virtual cards and ATM use.
The mobile wallet will also enable banks to boost financial inclusion. Customers can register for the service without opening formal bank accounts, giving more people a pathway to traditional banking services and thus decreasing the unbanked population. Only a minority of Egypt’s adult population owns or shares an account at a formal financial institution, meaning the potential for growth stemming from promoting inclusion remains high – a situation the government and banks discuss frequently.
How can the government and sector stakeholders further incentivise the private sector to make use of bank financing?
EL SALAWY: Encouragements could include the reduction of interest rates associated with special lending products, including SME-, tax- and employee-related incentives, stretched tenors, a reduction in import requirements, relaxed payment terms and rewards for backward integration. Other measures to encourage private sector credit could come in the form of cashback rewards, where incentives are provided for on-time repayment; for example, a 25% reduction of the interest rate if monthly payments are made on schedule. Another approach is to offer a future interest rate reduction, whereby customers are given a sizeable reduction in the interest rate of their next loan if current loan payments were all made on time. Recent incentives announced by the government were focused mainly on lowering interest rates to facilitate access to credit.
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