Need a loan? You could try a bank. Yasser Sobhi finds it is not that simple In Egypt, the concept of personal loans is still in its infancy. Yet banks, led by a handful of foreign players, are betting on the untapped potential of this new market. Indeed, both banks and consumers agree on the necessity for a more regulated and disciplined financial market for consumers. From now on, if you are an employee with a minimum salary of LE1,200 per month, you will be eligible for a personal loan from one of the handful of banks providing the service. You could use these funds to buy a car, an apartment, consumer goods, or just borrow cash. Banks can also ask for guarantees, which would enable them to lower interest rates on the loan and provide larger sums. Without guarantees, interest rates could be 18 per cent per annum, or even higher. In addition, the Central Bank of Egypt (CBE) requires banks not to allow monthly payments to exceed 25 per cent of the monthly income of the borrower -- an important precaution. "[Personal loans] are expanding rapidly, mainly for cash and car loans, but less in retail businesses. There is a lot of potential, banks can lend more, but personal loans are still relatively unimportant, in terms of the overall activity of banks," said Gerome Guiraud, managing director of the National Societe General Bank (NSGB). "It is not because the banks are not willing, but because the market is still nascent. In fact, Egyptians like to save; deposits are in the billions. We hope personal loans can match these levels," he added. Yet, there is still no precise figure on the volume of personal loans. Due to fierce competition banks prefer to keep their figures confidential. One banking source estimates the number of personal loans for fiscal year 2001- 2002 to be around 47,000 loans, with amounts varying between LE2,000 and LE100,000. Sources added that most loans are under LE30,000 due to the low average income of individuals. Additionally, the necessity of collateral has traditionally discouraged people from going to banks for personal loans. On their part, banks tended not to value the activity either, since it required the same administrative effort as a corporate loan, with much lower margins. It was only when some foreign banks decided to expand their activities in Egypt, introducing new products, that personal loans started to increase. Citibank, HSBC and NSGB are among the market leaders in personal loans. "[The increase in] personal loans is one positive outcome of having a foreign bank presence in Egypt. However, retail banking needs greater regulatory and disciplinary measures in order to grow in a healthy manner," said Mahmoud Mohieddin, head of the National Democratic Party's economic committee and member of the board of directors at the CBE. Mohieddin added that the new measures should include an information system that will be able to ascertain the credit-worthiness of clients: an activity that should be undertaken in a collaborative manner. "Interest rates and fees are artificially high in order to hedge against risks posed by a lack of information on clients and the absence of collateral. It is like we are punishing all borrowers because banks do not do their homework," he said. He added that banks should also respect borrowers rights by informing their clients about the full conditions of the loan. Additionally, the system needs legislative reinforcement to allow banks to collect money if clients are not paying up. "When these conditions are fulfilled, personal loans will have a lot of advantages for banks, as the rate of collection is higher for individuals than it is for firms. It also generates a diversification of credit, lowers the concentration of clients and provides a convenient rate of return in comparison to risks undertaken," said Mohieddin. In fact, personal loans would be a solution for the dilemma currently faced by Egyptian banks: a surplus in liquidity (interbank rates dropped by more than half in the last three months, to around 4.5 per cent) coupled with an unwillingness to provide credit to businesses. "The rate of collection for personal loans is high. Most individuals want to pay, they have their accounts with the same bank and in case of problems, there are solutions. It is more difficult to have friendly dispute settlements with firms and businessmen because of regulations, punishments, taxes and other creditors. These can often only be resolved by lengthy legal procedures," says Guiraud. He added that, although interest rates and fees are high on credit cards, this is not the case for personal loans, as competition is on the increase. Meanwhile, banks are not differentiating between rates for individuals and those for firms and businessmen. Some borrowers use loans for weddings, vacations or small businesses, but most personal loans are used to buy cars, specifically used cars. "In fact, we don't care how the borrower will use the loan as long as he pays regularly, even if he quits his job. We're trying to make people stop fearing the word 'loan'. Personal loans are profitable for banks without a very high risk," said Safwat Nagui, personal loans officer at Citibank. He added that high charges and small amounts compensate for the risk of not requiring extensive guarantees. Individuals, consumers and banks seem eager for the personal loans industry to grow. But, many impediments remain, with low incomes topping the list. "There is no real consumer banking market in Egypt. Although retail businesses try to provide financial solutions to consumers, lending money is an art that requires specific skills which exist only in financial institutions. When retail companies try to do both, seller and banking roles, we don't get the best from each activity," said Guiraud. "We need a partnership between banks and large retail companies in order to develop the marketplace and encourage more banks to get involved," he added.
