Toward a Cashless Economy

CAIRO - 27 September 2018: As Egypt realizes the risks and adverse impact of cash transactions on economic development and inclusive growth, the most populous Arab country has taken significant moves toward achieving financial inclusion.

As defined by the World Bank Group, financial inclusion entails that “individuals and businesses have access to useful and affordable financial products and services that meet their needs—transactions, payments, savings, credit and insurance—delivered in a responsible and sustainable way.”

Over the past few years, a number of initiatives aiming to build a cashless economy and enhance financial inclusion have been launched. But despite the support of President Sisi, they still seem to face several obstacles. In November 2016, Sisi launched the National Council for Payments (NCP), which he chairs himself, in an aim to lead Egypt toward a cashless economy.




In February 2017, Sisi issued a decree establishing the council and delineating the scope of its responsibilities. The council aims to reduce the use of banknotes outside the banking system, motivating electronic payments and modernizing the national payments systems.

Speaking at the opening of the Financial Inclusion Forum held in Sharm El-Sheikh in September 2017, President Sisi asserted the importance of financial inclusion as one of Egypt’s main targets. Among the benefits is ensuring access to financial services for all citizens, especially women and youth, helping merge the informal economy with the formal one; this would thereby boost economic growth and improve citizens’ living standards.

The Central Bank of Egypt (CBE) also took part in various local, regional and global initiatives to flag financial inclusion as a top priority during the last few years, particularly widening the scale of financial inclusion in Egypt.

One of the most important initiatives was that pertaining to SMEs, launched in January 2016, which directed local banks to increase finance provided to SMEs and allocate no less than 20 percent of their lending portfolios to these businesses at a competitive interest rate over four years.

The initiative also ordered banks to establish specialized units providing financial services to these enterprises. Local SMEs received a total of LE 49 billion since the launch of the initiative in 2016 through to June 2017.

In 2014, the CBE launched the LE 10-billion mortgage finance initiative; last year, its scope was amended and the CBE decided to double the funds allocated to the initiative to LE 20 billion.

In July 2017, Egypt, China and Mexico were selected as model countries in the WB’s Financial Inclusion Global Initiative. The three countries are already part of the Universal Financial Access 2020 (UFA2020) initiative, led by the WB, aiming to bring 2 billion unbanked adults in 25 countries into formal financial systems.

The three-year initiative aims to ease access to financial services to the unbanked and under banked, and develop policy recommendations in digital finance.

According to the WB, more than 55 countries have made commitments to financial inclusion since 2010. Another 30 either launched or are developing a national strategy. The international organization affirmed that pace of reforms accelerates in the countries instituting a national financial inclusion strategy.

Founder and Managing Director of boutique investment firm Multiples Group Omar El-Shenety praises the efforts exerted and initiatives launched so far, but he says that a lot more should be done to promote financial inclusion in Egypt.

“All these efforts have created momentum and were fruitful. Banks are becoming more open to small enterprises, expanding in financing SMEs, and some banks have already created special products for providing microfinance services,” says El-Shenety.

In line with El-Shenety, Mubasher International’s economist Israa Ahmed commends the steps taken by the Egyptian government after realizing the opportunities lost due to financial exclusion.

She stresses that these measures will optimize chances to assess the informal economy and better prepare it for integration with the formal economy.

She adds that the SME initiative “was a good step because one of the imbalances that drives away the informal economy is its inability to obtain adequate finance at affordable rates. Thus, the move was one of the most critical incentives for attracting the informal sector and providing financing alternatives.”

The establishment of the NCP also managed to put in place the necessary framework and coordinate between different policies, she adds.

Economic expert and former head of the Egyptian Direct Investment Association Hany Tawfik, however, seems less optimistic about the progress toward financial inclusion so far. “We have seen the establishment of the NCP, but it has not taken any serious steps until now. . . .This begs the question about our will to achieve financial inclusion and make significant progress in this regard,” he argues.

Tawfik stresses that financial inclusion requires high expenditure from the CBE on infrastructure in order for it to reach every individual and business owner nationwide. We should avoid repeating the mistakes of India, he says, which expanded financial inclusion before getting its infrastructure fully ready for such development.

On the challenges and hurdles facing the countries in the way to financial inclusion, the WB’s list includes ensuring financial access and services extending to hard-to-reach populations, including women and the rural poor.

Promoting citizens’ financial literacy and capability to better understand different financial services and products is among these challenges, in addition to making sure everyone has valid identification documents and a low-cost, accessible means for them to register.

Financial inclusion also requires providing useful financial products, addressing consumer needs, as well as establishing strong financial consumer protection frameworks. Other factors include adapting relevant regulatory and supervisory authorities and utilizing technology to improve supervision known as “regtech,” according to the WB.

The readiness of infrastructure

To improve financial penetration and extend banking services, economists interviewed urge the CBE to direct banks to open new branches attracting hard-to-reach individuals and businesses in Upper Egypt and rural areas. Banks should expand, even in Cairo, to reduce waiting time at branches.

The Egyptian Post is playing a role in filling this gap through its wide penetration in Upper Egypt and rural areas, where low-income individuals trust the services of the historic organization.

“The post is a big foundation and its role complements the role of banks in achieving financial inclusion. They are not competitors,” says El-Shenety.

Financial inclusion comes at many levels, starting from bank accounts to e-banking and mobile banking services, and promoting financial services under previously rudimentary circumstances like those in rural areas takes time.

It also requires wider implementation of the small-branch concept, and the two largest public banks should have branches spread nationwide. “In the US, there are very small bank branches that look like a post office or even a kiosk,” El-Shenety says.

Tawfik echoes El-Shenety, adding that, “Banks should not find it difficult to open small branches in Upper Egypt and in rural areas; they should have retailers approaching people even at home. We should also benefit from the post offices in these areas.”

Tawfik says the CBE should first ensure that bank branches, ATMs, mobile banking and electronic payment systems meet targeted demand.

The next step is an announcement by the president putting in place a deadline for changing the design of the local currency and allowing individuals a window for depositing their cash and savings at banks. “India did not ask depositors about the source of their money, but instead imposed a 15 percent tax on their deposits.

After that, the parliament should maximize penalties and punishment for cash transactions,” he highlights.

Informal economy grows on financial exclusion

Weak financial penetration is always linked with high poverty and unemployment rates, tax evasion, financial crime such as money laundering and financing terrorism, and other illegitimate activities.

The WB considers financial inclusion a key enabler to reducing extreme poverty and boosting shared prosperity, and the bank has an ambitious global goal to reach Universal Financial Access (UFA) by 2020.

Financial inclusion, the informal economy and SMEs are all closely connected issues; so much so, that they might be considered one issue with multiple aspects, says Mubasher International’s Ahmed.

“According to the estimates of different studies as well as its various definitions, the informal economy accounts for around 40-60 percent of the Egyptian economy,” she says, adding that the figure is “dramatically dangerous” since it reflects a real productive capacity, mostly from SMEs and micro businesses, not benefitting from any financial or monetary incentives or initiatives by the state to revive this sector.

On the other hand, this figure represents a significant loss as the state budget is deprived of tax revenues from these businesses, she explains.

Another risk is the disruption of the monetary policy mechanism, she adds. “The lower the number of banks’ clients, whether individuals, families or businesses, the weaker the control of policymakers on their policies and instruments, such as the interest rate,” she clarifies.

The expansion of the informal economy is evident through indicators of the banking sector as the ratio of borrowers from commercial banks in Egypt is about 10 percent of each 1,000 adults. For depositors, it is about 36 percent; this is quite low compared to other emerging markets like Turkey, Jordan and South Africa, says Ahmed, citing recent data from the WB.

“There is still much to do,” says Ahmed, noting that the first problem with the informal sector is an issue of confidence, as business owners prefer to stay away from the formal framework to avoid taxation and see no necessity in joining the formal segment.

She calls for more incentives for financing, increased support for manufacturing and exporting activities and fixed tax incentives for the informal economy and small business.

“The absence of specific and unified definitions is also an issue, as the CBE’s definition of SMEs may differ from that set by the Ministry of Finance’s SMEs apparatus. Standard definitions and criteria must be established to ensure policy coherence.”

In 2014, the Wold Bank said that only 12 percent of Egyptians and 14 percent of adults had bank accounts, marking a very high level of financial exclusion. However, thanks to adopting various initiatives and programs along with measures to encourage account penetration, the figure jumped to 33 percent among Egyptian adults, the CBE’s Deputy Governor Tarek el-Kholy said in his speech at the Financial Inclusion Forum held in September last year. Despite this remarkable improvement, this level of penetration remains well below 84 percent in the UAE, 82 percent in Bahrain and 73 percent in Kuwai, according to WB data.

Generally, the level of financial inclusion in the Middle East and North Africa (MENA) region is one of the lowest worldwide, according to the WB, yet the organization affirms that “Egypt has the ability to bring 44 million citizens to the formal financial sector.”