Dante Campioni, Managing Director and CEO, Alexbank; Mohammed El Etreby, Chairman, Banque Misr; Hisham Ezz El Arab, Chairman, Commercial International Bank; Hisham Okasha, Executive Chairman, National Bank of Egypt: Interview

Interview: Dante Campioni; Mohammed El Etreby; Hisham Ezz El Arab; Hisham Okasha

What have been the short-term consequences of the currency flotation for the banking sector?

DANTE CAMPIONI: First, we saw an immediate increase in foreign currency flows coming into the banking sector, as the new parity led to direct foreign exchange (forex) transactions into formal channels. The consequence of this was an increasing availability of forex to satisfy the commercial needs of companies. According to Bloomberg, $49bn of trade-financing transactions were executed between the currency flotation in November 2016 and August 2017 by banks operating in Egypt.

The swift and sharp depreciation of the Egyptian pound created a natural barrier to imports while supporting export activities, as confirmed by the strong correction that occurred in the country’s trade balance. This increase in competitiveness had an impact on the tourism sector, which experienced encouraging growth despite bucking the global trend. These factors had an impact that was clearly perceived by banks through their relationship with their customers, whose needs and demands changed accordingly.

MOHAMMED EL ETREBY: Overall, the consequences have been very positive. Before the free float in 2016 our banks were suffering from currency shortages, clients were experiencing a backlog, and lending and remittances were coming through unofficial channels. The free float eliminated any backlog in the waiting lists for our import customers. It is the first time since 2011 that we have strong foreign currency reserves. In addition, the flotation eliminated the parallel market. The interbank rate is active and net foreign reserves of the Central Bank of Egypt (CBE) increased from a low of $13bn to reach $36.7bn, as of late 2017. Foreign portfolio investors also started to invest in Treasury bills and the stock market. In the beginning we did face constant volatility in buying and selling prices, but now all the prices among the banks are within a narrow range and all proceeds go directly to the banks. This is a direct result of not having a parallel market and allowing the price to be decided by supply and demand. Another positive effect of floating the currency has been that non-essential imports have decreased and exports have increased, with the effect of shrinking the trade deficit.

This is all related to the decision the CBE took with the government, and has positively affected our banking sector and instilled new confidence in the economy.

HISHAM OKASHA: Like any major shift in policy or pricing, the currency flotation was initially followed by volatility. However, we are currently in a much better position; banks have regained foreign currency flows, the parallel market has been eradicated and banks’ resources have increased tremendously. The banking sector has obtained resources of over $80bn which was then deployed for investments in trade and business requirements. Therefore, we can now observe that the cycle is consistently moving in the right direction. The exchange rate is stable with only minor end-of-year seasonal fluctuations, which is considered normal.

Overall, the policy change has proven very effective for the revival of the interbank system. Additionally, banks have been able to meet the demands for all importers. The sector has shown resilience and investor confidence has improved greatly as evidenced by the increased foreign reserves, which are over $37bn, higher than it was before 2011.

What efforts are commercial lenders making to increase financial inclusion in Egypt?

HISHAM EZZ EL ARAB: Egypt, along with many other countries in the developing world, suffers greatly from the large size of its parallel economy, which is estimated to be worth LE1.8trn ($166.7bn), according to the prime minister. Therefore, bringing it into the formal sector represents one of the most pressing challenges to the country’s economic development.

Currently, the government’s efforts are centred on the two untapped sectors with the greatest economic potential, namely small and medium-sized enterprises (SME) and the young unbanked population. The CBE has been providing financial facilities and encouraging banks to tailor products to serve the specific needs of the SME sector and support its further development.

Additionally, there are a number of banking sector collaborations that are supporting the government’s drive to accelerate financial inclusion. The Federation of Egyptian Banks (FEB) has been working with different entities to foster the transition to a cashless society. For example, the FEB, in cooperation with the Federation of Egyptian Industries and the Centre for International Private Enterprise, conducted an extensive study on the policies and mechanisms of transferring monetary transactions to non-monetary ones. As a result of the findings, an integrated national programme was proposed to encourage and regulate the transition. The programme is aimed at achieving the desired objectives of the economic and financial reform policies being implemented by the government.

CAMPIONI: In order to achieve full financial inclusion, joint efforts have to be undertaken by banks, both of the private and public sectors, and authorities. This is the only way to achieve an environment favouring access to financial services. Not only is it necessary to make available to a wider audience a full set of financial products and services, but these have to be offered at attractive costs to make the benefits clear to new customers. In this sense newly available technologies and the diffusion of internet connectivity offer opportunities that banks and other institutions are keen to exploit. The automation of cash services through the deployment of new multi-functional ATMs, the adoption of point of sale banking and the diffusion of e-banking solutions are continuously increasing the opportunities to easily access affordable financial services.

Commercial banks in Egypt are actively taking part in all governmental initiatives related to the development and consolidation of financial inclusion. Furthermore, banks have intensified their efforts to reach the unbanked layers of population engaged in economic activities, offering a variety of customised products to micro-, small and medium-sized enterprises, as well as a growing commitment to microfinance.

OKASHA: Our main role is financial intermediation; this becomes very important in helping to formalise the informal sector. To achieve this, discussions with sectors of the informal economy are currently under way. The main challenge is to create new markets and to bring all sectors into the formal economy. Of a population of around 100m, 54m are of voting age, while current banking penetration is only at around 12-18%.

However, financial inclusion does not mean that someone has to have a bank account to benefit. The government has also been making huge efforts with mobile wallets, social insurance and social benefits in order to reach as much of the population as possible.

EL ETREBY: Financial inclusion is very important for our economy, and it is up to the government and the banking sector to encourage it. Every citizen has the right to open an account and to enjoy financial services.

The first priority is to support microfinance and SMEs, as this will create jobs, help merge the informal with the formal sector, promote the domestic market, encourage exports and have a positive effect on our financial ratios. The second priority is to open branches in order to penetrate places that have previously lacked banking services. The third priority is to provide mortgage finance for low-income citizens to allow them to buy flats through interest subsidised by the CBE. The fourth priority is to move into digital banking services.

What sort of potential do you see for cashless transactions in the near future?

OKASHA: You have a lot of countries that are talking about cashless societies, but cash will always be used. So the most important issue for Egypt is about bringing payments into the formal sector. The CBE has adopted a very forthright approach towards encouraging electronic payments, either through internet banking, mobile applications or organising the payment of government employees through salary cards. Egypt has also embarked on the new e-visa which visitors can apply for online. Furthermore, we are currently looking into the installation of pre-paid electricity metres. All of this demonstrates that Egypt is moving towards more electronic payment systems and the potential is huge. Financial stability is very important for the sector, but I think we need to seek to achieve a good balance between financial inclusion, intermediation and having a strong sustainable banking system.

EL ETREBY: With the move into an increasingly digital age in banking, there is a lot of potential and a necessity to move towards a cashless banking system. It provides many advantages such as speed and convenience. This will enhance competitiveness and promote financial inclusion. The government, under the direct supervision of the President, and the Central bank are pushing hard to develop the digital future of Egypt and reduce the reliance on cash to help drive efficiency, financial inclusion and better transparency.

EL ARAB: Moving towards a cashless society is the most effective way of increasing overall financial inclusion. The integration of current state-of-the-art technologies will be key to reaching the young, unbanked population, and investment in digital platforms has already helped launch new products to that end. In addition to developing technology and IT infrastructure, investment will also support financial technology (fintech) innovations. Fintech entrepreneurs are addressing the financial needs of the Egyptian youth by designing and creating digital solutions that promote cashless activity.

The government has implemented numerous initiatives that promote e-payment and decrease dependence on cash. The establishment of the National Council for Payments (NCP) which is chaired by the president, serves as an important step towards the expansion of electronic transactions. The council works to reduce the use of banknotes outside of the banking system. It also promotes e-payment channels and increases tax collection, all of which serves to formalise the parallel economy. The Ministry of Finance recently eliminated the use of paper cheques and released an electronic payment system that works with a Treasury Single Account (TSA). All payment of state agencies is now carried out through this system, resulting in the closure of approximately 61,000 accounts.

The next step of this process will include the introduction of the Government Fiscal Management Information System (GFMIS). The GFMIS will be linked to the TSA in order to ensure that all electronic payments will be made solely through the government’s public financial information and management system.

CAMPIONI: The authorities and the CBE are committed to promoting financial inclusion while decreasing the weight of cash transactions. Also, there are coordinated joint efforts under way between the public authorities and the financial sector. These initiatives can shape the regulatory framework by developing specific directives and policies, while also improving accessibility to innovative digital solutions. The commitment of the government is clear with the establishment of the NCP whose aim is to define policies supporting a substantial reduction in cash payments. The recent implementation of the interoperability of electronic wallets under the guidance of the CBE, with a substantial increase in the amount limits, is another clear indication of the direction being taken by the authorities.

Some of the obstacles to cashless transactions are technical, these include the overall low level of financial literacy, the limited familiarity of the public with the newly available digital financial services, and the low geographical penetration rate of banking and smart-phone usage in remote and underprivileged areas. Another fundamental obstacle is the commonplace tendency for businesses to make their economic activities untraceable through the use of cash payments.