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IN DEPTH: Egypt needs bigger plans for microfinance, say experts
Published in Daily News Egypt on 25 - 09 - 2008

CAIRO: In 2006, Bangladeshi Dr Muhammed Yunus won the Nobel Peace Prize for his achievements in microfinance with the Grameen Bank, changing the way the world views the kind of action needed to eradicate poverty.
The poor don't need good advice, moral support or charity, rather "a little capital to start climbing the economic ladder - also known as microfinance, a development tool to help the poor contribute to economic growth.
As experts in both developing and developed markets learn more about their poorer economic segments, the view towards microfinance is changing.
A change like this will alter the economic landscape in a developing country like Egypt as competitiveness and diversity rely heavily on the strength of home-grown micro, small and medium enterprises.
Most of Egypt's poor are concentrated in the rural areas of five governorates in Upper Egypt and in squatter and informal settlements of larger metropolitan areas, according to UNDP reports. Some of the nation's poorest are agricultural laborers, urban industrial employees and a large number of government workers. In this context, experts say, microfinance is an ideal tool to contribute to private sector-led growth by promoting micro-enterprises that increase income and create jobs.
The question is, can Egypt's financial sector adapt to the needs of micro-entrepreneurs?
Currently the size of microfinance services in Egypt cover only 3 percent of the total market need, according to Sanabel, a regional network for microfinance institutions (MFIs) in the Arab world. Compared to a country like Morocco, which reaches over 30 percent, Egypt's microfinance market is grossly under-penetrated.
Inability to acquire property rights is the main reason the poor have no access to capital or credit, therefore, they find it hard to make it as entrepreneurs, said Frederic Mishkin, a former member of the Board of Governors of the Federal Reserve System.
Microfinance programs provide financial services - such as credit, deposit and saving - to the entrepreneurial poor. Effective microfinance programs offer small (between LE 500 to LE 1,000 initially), short-term repeat loans, alternative approaches to collateral, convenient location and timing of services and above-market interest rates to cover the high transaction costs inherent in microfinance.
Under the Egypt Microfinance Strategy - created by the Central Bank of Egypt - microfinance donors, mainly USAID and the UNDP, established the Egyptian Microfinance Network in 2006 to unify MFIs.
Magdy Hussein, advisor to the Egyptian Microfinance Network (EMFN), said their vision is to "provide microfinance on a sustainable institutional basis and not a donor project basis to the market.
"As we see globally the adoption of microfinance by the commercial banking sector, a similar direction is expected in Egypt because our MFIs are showing good profitability, he added.
Viable MFIs cover their own lending costs, avoid subsidies, promote outreach of services and maintain a targeted social mission as well as financial returns to shareholders.
With a quarter of the population considered poor and another quarter living on the edge of poverty, a country like Egypt cannot afford to have a poor perception of the lower-income segment of the population.
Kristen Besch, interim executive director of Sanabel Egypt, said a balance is needed between MFIs' "double bottom-lines, or how well they perform on their social mission and financial returns. Industry benchmarks such as the Forbes Top 50 MFIs typically assess these indicators.
While the commercial banking sector brings the capacity - in terms of branch reach, capital and financial services - to cater to microfinance needs, NGOs and other MFIs hold valuable experience and a broad understanding of social mission.
On the structure of Egypt's microfinance industry today, Ranya Abdel Baki said, "The legal structure of most MFIs in Egypt continue to be predominantly NGOs (95 percent), and the biggest player by far is USAID. "On the other side are just three commercial banks with no social mission that are downscaling their services to capture a small niche of lower-income borrowers. Microfinance banks are not growing in comparison to their NGO counterparts.
Specialists say commercial banks' reluctance to take risks is the main reason for the slow growth of microfinance in Egypt. When USAID started many of the MFIs in Egypt, they were given large amounts of donations as collateral which they could borrow against. In addition, a general aversion towards NGOs or microfinance means they are limited to how much money they can source from the market, she added.
The solutions to these obstacles lie in observing developments in comparative markets. In Morocco, for example, local bank Banque Populaire, created its own microfinance NGO, Abdel Baki said. With this close relationship between banks and NGOs, their leverage rates increased three-fold.
Amanah, the biggest MFI in Morocco, will issue a bond in the market very soon.
Another challenge to microfinance growth is training the right staff to grow a bank's microfinance program. Specialists point to commercial banks such as Banque du Caire's, which has established a microfinance department as a means to absorb abundant staff during privatization restructuring.
The career of a microfinance loan officer, which often entails forging relationships with customers by visiting their home or workplace, is very different from the typical desk job.
As commercial banks invest in corporate finance and suffer big defaults, more and more are restructuring their portfolios and leaning towards retail segments. Still, "microfinance programs in Egypt's commercial banks constitute less than 0.1 percent of their total portfolios to date, Abdel Baki said.
For the time being, the financial services sector is still learning to adjust its perspectives towards the entrepreneurial wealth of Egypt's poor and treat them as an untapped financial resource in the mission to integrate lower-income segments into the growing economy.
To read the other stories in our monthly special focus on Egypt s banking sector, click here:
http://www.thedailynewsegypt.com/article.aspx?ArticleID=16712
http://www.thedailynewsegypt.com/article.aspx?ArticleID=16711
http://www.thedailynewsegypt.com/article.aspx?ArticleID=16709


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