Dozens of central bank governors, bankers and economists from 94 countries gathered in Sharm El-Sheikh last week for the ninth annual “Alliance for Financial Inclusion [AFI] Global Policy Forum” Conference. The event gathered extensive media coverage, not only because it was attended by President Abdel-Fattah Al-Sisi, but also because the term “financial inclusion” is being explained by media outlets and TV anchors as one way to improve the welfare of society. Al-Ahram Weekly explains it in a snapshot.
What is financial inclusion? The term became popular in the early 2000s and means making banking and financial services available and affordable to all businesses and individuals in society. These services include savings and deposits, payment and transfer services, and credit and insurance, as well as online payments and mobile banking. It also entails access to micro-finance, which means providing funding to poorer entrepreneurs and small businesses lacking access to banking and other financial services.
What are the benefits of adopting it? Growing financial inclusion should open up services to poorer, rural and other disadvantaged segments of society that in the past have had no easy access to financial services. The inclusion of the poor and micro-sized companies in the formal economy is a means of combating poverty. Financial inclusion can thus be a direct contributor to economic growth and financial stability, as the economic situation in a country will not improve if there is a huge number of individuals and businesses excluded from the formal financial system. It means that the state can have a more comprehensive database of individuals and businesses and a means to integrate the informal economy into the formal. Financial inclusion gives a clearer picture of all the financial transactions taking place in a country, helping to increase tax revenues and target those who need subsidies. Better prices, as well as more user-friendly products, can be delivered by different financial institutions competing among themselves to attract more customers.
Where does Egypt stand from this? According to World Bank data on financial inclusion, the percentage of the population above the age of 15 in Egypt that has bank accounts is only 14 per cent, compared to the 42 per cent on average in the group of lower middle-income countries. The percentage drops to only five per cent of Egyptian adults belonging to the poorest 40 per cent of the population. The limited use of this already low number of accounts is also a concern: only three per cent of those who have bank accounts use them to receive their wages and a meagre 0.1 per cent use them to pay utility bills. The data reveal that while 4.1 per cent of the population over 15 years old saved in a bank account in 2014, 12 per cent of the same group saved with a friend or through a savings club. As for borrowing, those acquiring a bank loan in the same year represented only 6.3 per cent of those older than 15, while those who resorted to family, friends or informal lenders represented 24 per cent. The percentage of informal activities in Egypt is estimated to be 40 to 60 per cent of the economy, according to a recent study by the Centre for International Private Enterprise (CIPE), a think tank. The CIPE defines the informal economy as economic units which do not adhere partially or totally to official procedures, including having a license to exercise activities, trade or industrial registration, social insurance coverage and payment of taxes on economic activities based on regular auditing. In its pursuit of more inclusion in the financial system, the Central Bank of Egypt (CBE) in 2014 asked the banks to open branches in remote areas and lower the minimum capital required to open accounts as well as expanding financing for small and medium-sized enterprises. It issued regulations for mobile banking services including payments and receiving salaries via mobiles. A set of regulations governing online banking has been introduced to guarantee the safety of such transactions.
What are the impediments of its spread in Egypt ? Banks and financial services companies, small- and medium-sized companies or low net-worth individuals are not seen as important as the cost and risks of dealing with them are much higher than the yields expected. “Laws issued over the past two decades have focused on combating money laundering, terrorism financing, and other financial crimes, which runs counter to the drive for simplification and fewer restrictions,” wrote Ziad Bahaaeddin, former head of the Egyptian Financial Supervisory Authority, the regulator of non-banking financial services, in Al-Ahram Online last week. He added that the banks and other financial institutions had shown little interest in attracting small depositors and investors given attractive and guaranteed channels for investing private assets through public debt-financing. “It has also proved difficult to adapt banking regulations and laws to the needs and circumstances of the informal sector and unregistered business activities,” he noted.
Has it really succeeded in other countries? The Chinese experience of financial inclusion has been encouraging, and in China today eight in every 10 adults now have a bank account, according to a 2014 survey. This is 15 per cent higher than was the case in 2011. What is even more important is that rural and poorer people constitute many of the “newly banked” adults, with 66 per cent of the poorest segment of the population having bank accounts. Ninety-two per cent of these are mostly active accounts, in other words are being used either in saving, depositing or getting loans. The number of adults making payments from their bank accounts using a mobile phone is equivalent to 19 per cent of Chinese adults. According to the Consultative Group to Assist the Poor (CGAP), a global partnership of 34 leading organisations that seek to advance financial inclusion, to reach this situation China embarked on policies including introducing new financial-service providers such as microcredit companies and village and township banks to serve unbanked segments. The Postal and Savings Bank of China has expanded its services to serve more than 400 million customers. “The Chinese government now delivers subsidies to beneficiaries through bank accounts. Recipients can visit one of 900,000 bank agents such as mom-and-pop shops and use their card to collect their funds through an electronic point-of-sale device,” the CGAP website states.
