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Ever steady banking sector looks to increase penetration

Article - February 25, 2016

While banks have undoubtedly provided a solid backbone to the economy, the Egyptian population remains dramatically underserved


Egypt has 54 million voters. It has 34 million Internet users. It has something like 100 million cell phone lines. And yet the entire country has no more than eight to 13 million bank accounts, for a population of 92 million. Should that be considered an anomaly or an opportunity? Both, says Hisham Okasha. He should know, because he is Chairman of the National Bank of Egypt (NBE), one of the country’s oldest banks that keeps a proactive eye on  possibilities opening up for financial service providers.

“The potential for retail banking is huge,” enthuses  Mr Okasha. “The NBE grew its retail business from EGP 10 billion Egyptian pounds (£810 million) in 2009 to EGP 36 billion this year, and we’re aiming for EGP 50 billion. You have potential for small and medium enterprise (SME) lending, you have the integration of government payroll systems or even private sector companies entering the banking business and cross-selling on that.”

According to Fathy El Sebai Mansour, Chairman of the Housing & Development Bank, that low volume is not due to neglect or disdain. “The number of products is large and diversified. The problem is that Egypt is a huge market in its geographical structure but without enough branches to service it. Fortunately, the Central Bank realises the importance of opening new branch offices, especially in the suburbs and villages. That will help drive up the number of customers. I assure you we can double current numbers in five years’ time.”

An underdeveloped retail base is not the only thing that makes Egyptian banking a special case. The country’s banks are awash in flood of surplus liquidity – around three times the government’s reserve requirements. So they buy up treasury notes and other short-term debt instruments from the Central Bank of Egypt and use the interest they are paid on them to acquire more and more no-risk debt.

 Bad news for the government, trapped in an endless cycle of self-inflicted deficits as the price for keeping a lid on inflation. Bad news for importers and exporters, whose access to foreign currency has been severely curtailed. Good news for banks, even though they would much prefer to be loaning out money to businesses instead of the government.  

This situation helps to explain why President El Sisi and his cabinet are so keen on expensive high-end mega-projects like the futuristic New Cairo capital city transplant, or the Suez Free Trade Zone, that would act as a sponge to soak up surplus liquidity. That’s still in the future, though. As far as the immediate present is concerned, the sector where massive investment is most urgently needed is in housing.

“The problem is that Egypt is a huge market but without enough branches to service it. Fortunately, the Central Bank realises the importance of opening new branch offices.”

Fathy El Sebai Mansour , Chairman, Housing & Development Bank

Numbers tell the story. 92 million Egyptians live on less than 5 per cent of the land; all the rest is desert. In 1922, around one million people lived in Greater Cairo area. By 1973, it stood at six million. Today, the population is approaching 18 million. Give it two more decades and the figure is expected to be 25 million.


The result, according to  Mr El Sebai, is acute, systemic shortage. “As of right now, two million housing units are needed. Every year, over 650,000 new marriages take place and people want to start a home and family. The government decided to construct 250,000 units per year, with the rest covered by the private sector. But the private sector should build smaller, more affordable units to satisfy the market’s demands.”

SMEs are a particular target of Egyptian lenders, many of whom who have tailored their product lines to that market. The finance minister, Hani Qadri Youssef Demian, helped devise legal measures aimed at promoting SMEs greater financial inclusion and widening the tax base. “A new law was issued creating a channel through which microfinance lending can grow and support the SME sector,” he says. “Furthermore, the network of bank branches is being expanded in remote areas, with lower capital requirements to focus on SME lending. Meanwhile, a simplified tax system for SMEs is being developed.”

“The potential for retail banking is huge. You have potential SME lending, integration of government payroll systems or companies entering the banking business and cross-selling on that.”

Hisham Okasha, Chairman, National Bank of Egypt

Mortgage financing was not introduced until a decade ago, and is still a minority option among borrowers, says  Mr El Sebai. “The problem in Egypt is that inflation is high,” he explains. “So when you offer mortgages for 15 or 20 years, everybody becomes astonished at the final cost. “If interest rates were lower, like in most Western countries, it would be much easier to accept. It is important to have an affordable product. At the same time, the Central Bank should offer long term funding at lower interest rates for limited income home hunters.”

It may seem a paradox that Egyptian banks owe their enviable position to a combination of liquidity and solidity.   Mr El Sebai recalls how “in 2004 all the banks strengthened their financial positions by increasing capital, in order to implement advanced policies. Management changed across the board and experienced international bankers were brought in from all over the world.

“In the year 2008 we had the international economic crisis, but the banking industry was not affected at all. So we kept on injecting money, as was expected of us. When we were hit by a huge downside after the first revolution in 2011, we were not greatly affected and managed to make provisions for our customers because we were strong enough to maintain the economy and the keep the financial sector active.”

Generally, the industry consensus is: ‘The worst is over, now, can we can please get back to concentrating on growth?’ Mr Tarek El Refai, Managing Director of Barclays Bank Egypt, would agree with that strategy. “Demography means that we have to adapt the business model to maximize market penetration.”

“Egypt has a lot of potential and will continue to grow… It has always been an attraction and proves - now more than ever - one of the best destinations for stock market investors”

Mohamed Younes, Chairman, Concord International Investments Group

A century and a half after its precursor bank opened offices in Cairo, Barclays is now focused on developing products for the younger generation such as internet and mobile apps. Mr El Refai says that the bank’s accomplishment in Egypt over the last 150 years is down to such continual evolution.

“Barclays’ successful presence in the Egyptian banking sector for a century and a half is a reflection of its strategic policies, its understanding of the market needs and its ability to meet customer demands through innovative banking products and services, which have made it one of Egypt’s oldest banks with an unparalleled continuity capacity in such a promising market.”

Such deep awareness of the country means that Barclays is particularly aware of the need for banks to establish a physical presence in the countryside and around the new megacities so people can feel they know where their money is going. “This means we have to create a balance between the traditional market and the new emerging one,” he says.

Barclays Bank Egypt follows a universal banking model and offers a full range of services that involve lending, consumer banking, investments and project financing. The other component is Barclays PLC, dealing with investment banking, direct investments, and global equities. “We have a full portfolio that makes us the default partner of most of the British companies looking to start or expand business operations in Egypt,” says Mr El Refai.

The Concord International Investment Group is another well-established presence in Egypt’s capital markets who – as one of the leading fund managers of Egyptian securities – works closely with investors in the country.

Of the $1.64 billion managed by the group either directly or through affiliates, $1.34 billion has been invested in Egyptian equities. Founded in 1994, Egypt’s first funds management specialist was named “Best Asset Manager – Egypt” for 2015 by the Capital Finance International group.

“The Concord Group, with offices in New York, Cairo and Tokyo, has for more than 20 years been a leading manager of Egyptian listed and unlisted private equity funds,” says the group’s chairman, Mohamed Younes. “We also provide world class wealth management, investment strategy, corporate finance and strategic planning services.”

Going forward, Mr Younes says that while the country is already a credible partner for investors, and that the banking sector will continue to play a paramount role in this dynamic, he also concedes that Egypt still has some sizeable challenges to overcome.

“Egypt has a lot of potential and the Egyptian economy will continue to grow, but there will be challenges such as some problems facing the stock market and foreign currency,” he says. “Egypt has always been an attraction for investments and is proving – now more than ever – to be one of the best destinations for stock market investors, but we can do more to improve the investment environment.”

From this perspective, however, the Concord International Investments Group chairman is positive about the government’s efforts and is optimistic about the path that Egypt is taking under President El Sisi.

“I think the current government has managed to cut back dramatically the amount of problems.  [It] has no alternative but to face challenges like what happened lately in terms of fighting corruption,” he says. “Egypt is still is in good shape. After the events of the last few years, we are now right back on track again.”