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  • Access to Financeand Economic Growthin Egypt

    Access to


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    Middle East and North African Region

    A Study Led By SAHAR NASR

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    This publication provides a comprehensive and informative analysis of a key policy issue facing Egypt and other developing countries-how to enhance appropriate access to finance in support of sustainedhigh economic growth and improved income distribution. The detailed and elegant evaluations of the key segments of the financial sector are supplemented by a holistic discussion that draws out the maininteractions, including the linkages to institutional reforms. The timely publication will be interest to a large number of policy makers, academics, development practitioners and financial market participants.

    Dr. Mohamed A. El-Erian, President and CEO of the Harvard Management Company, member of the faculty of the Harvard Business School, and Deputy Treasurer of Harvard University

    Broadening the reach of the financial sector is the key to invigorating both economy and society. Ifmore small businesses can get access to the credit and other financial services they need to turninitiative into employment and profitability, and if low income households can gain the economic securityoffered by an account at an intermediary, economic growth and social welfare will both be enhanced. This report takes a close look at the Egyptian financial system to see how outreach and access can beimproved. It is firmly based on recently collected statistics and it provides a comprehensive analysis withrecommendations. Recent government initiatives have already begun to transform the Egyptian financialsystem. Access to Finance and Growth in Egypt points the way to future success in lifting the system to the next level.

    Dr. Patrick Honohan, Senior Advisor, World Bank; and Professor of International Financial Economics and Development, Trinity College Dublin

    Financial exclusion is likely to act as a brake on development as it retards economic growth and increases poverty and inequality. However, the access dimension of financial development hasoften been overlooked, mostly because of serious data gaps on who has access to which financial services. Hence, empirical evidence that links broader access to financial services to outcomes has been verylimited, providing at best tentative guidance for public policy initiatives in this area. However, without inclusive financial systems, poor individuals and small enterprises need to rely on their personal wealthor internal resources to invest in their education, become entrepreneurs or take advantage of promising growth opportunities. Financial market imperfectionssuch s information and transactions costsare likely to be especially binding on the talented poor and the micro and small enterprises, who lack collateral and credit histories.

    Asli Demirguc-Kunt, Senior Research Manager, Finance and Private Sector Development, Development Research Group (DECRG), World Bank

    For Egypt, access to finance can radically transform peoples lives, promote entrepreneurship,help bridge the urban-rural income divide, alleviate poverty and improve individuals lifetime economic and social prospects by integrating them into the market economy. In short, improved access to finance can be an engine of growth and structural transformation, if supported by other policies thatreduce barriers to competition, lower the cost of doing business and create incentives for moving out of the informal sector. For Egypt, where fewer than seven percent of households have a bank account, investments and policies that create and improve access to finance and its infrastructure, can breakdown economic and social barriers to economic growth and development. This well-researched report is an excellent guide and provides a practical tool-kit for economic and financial policy makers, banks andfinancial institutions seeking to improve Egypts financial infrastructure and access to finance.

    Dr. Nasser Saidi, Chief EconomistDubai International Financial Centre (DIFC)


  • Introduction i

    Access to Financeand Economic Growthin Egypt

  • Access to Finance and Economic Growth in Egyptii

  • Introduction iii

    Access to Financeand Economic Growthin Egypt

    Middle East and North African Region

    A Study Led By SAHAR NASR

  • Access to Finance and Economic Growth in Egyptiv

  • Introduction v

    Abbreviations and Acronyms viii

    Foreword ix

    Preface xi

    Acknowledgments xiii

    Executive Summary xvii

    I. Introduction 1

    II. Sources for Financial Services: The Banking Sector 23A. Access to Bank Financial Services 23B. Factors behind Weaknesses in Supply of Banking Services 28C. Access to Microfinancial Services 45

    III. Sources for Financial Services: Non-bank Financial Services 55A. Capital Markets 55B. Insurance and Contractual Savings 61C. Mortgage Finance 68D. Financial Leasing 73E. Factoring 76

    IV. Institutional Environment 81A. Legal Framework 81B. Information InfrastructureCredit Registry, Credit Bureau and Other Sources 86C. Financial Reporting Environment 89D. Financial Infrastructure 91

    V.Expanding Access to Finance 95A. Enhancing the Role of the Banking Sector in Financial Intermediation 95B. Expanding the Postal System and Microfinance Institutions 101C. Promoting Capital Markets in the Access Agenda 105D. Contractual Savings Industry Potentials for Growth 107E. Developing the Mortgage Finance Market 113F. Increasing the Financial Leasing Industrys Contributions to Access 115G. Developing the Factoring Industry 116H. Improving the Institutional Environment 117

    Annexes 130Annex 1: Indicators For Assessing The Soundness And Performance 130 Of The Banking System Annex 2: Indicators For Assessing The Capital Market 135Annex 3: Indicators For Assessing The Insurance And Contractual Savings Sector 136

    Bibliography 137


  • Access to Finance and Economic Growth in Egyptvi


    Table 1.1: Main Macroeconomic Indicators in Egypt (2001-2006) 7Table 1.2: Business Environment in Egypt 9Table 1.3: Various Sources of Finance in Egypt, MENA, and the World 15Table 1.4: Household Use of Financial Services by Education Level in Egypt 17Table 1.5: Use of Finance by Employment Status of Head of Household in Egypt 18Table 2.1: Frequency Distribution of Private Sector Credit in Egypt 25Table 2.2: Share of Savings Accounts by Size of Deposits in Banks in Egypt 27Table 2.3: Local Currency Deposit Interest Rates in Egypt 27Table 2.4: Number of Credit and Debit Cards Issued in Egypt during 2005 28Table 2.5: Branching and ATM Presence, Cross-Country Comparisons 30Table 2.6: Earnings per Employee of Banks in Egypt 37Table 2.7: Expense Ratio of Banks in Egypt 37Table 2.8: Main Reasons for not Lending to SMEs in Egypt 40Table 2.9: Lending Rates for Local Currency of Banks Operating in Egypt 41Table 3.1: Compound Annual Growth Rate by Sub-Sector in Egypt 62Table 3.2: Statutory Investment LimitsLife Insurers in Egypt 63Table 3.3: Assets and Investments in Egypt 63Table 3.4: Insurance Investment Allocation in Egypt 65Table 3.5: Private Pension Investment Allocation in Egypt 66Table 3.6: Investment Approach of the Contractual Savings Industry 66Table 4.1: History of Public Credit Registry Database in Egypt 86Table 4.2: Negative Databases of CBE Credit Registry 87


    Figure 1.1: Current versus Desirable Situation of Financial System 2Figure 1.2: M2-to-GDP in Selected Countries across the World 8Figure 1.3: Private Sector Credit-to-GDP in Selected Emerging Economies 9Figure 1.4: Investment Climate Constraints in Egypt as Perceived by Businesses 15Figure 1.5: Percentage of Firms Currently with a Loan from a Financial Institution in Egypt 16Figure 1.6: Enterprises Access to Finance in Egypt and Selected MENA Countries 16Figure 1.7: Households Share in Access to Financial Services by Educational Attainment in Egypt 18Figure 2.1: Loans-to-Deposits Ratio in Egypt 24Figure 2.2: Loan-to-Deposit Ratio in Egypt 24Figure 2.3: Treasury Bills-to-Total Assets in Egypt 24Figure 2.4: Government Sector Loans-to-Total Loans in Egypt 25Figure 2.5: State-Owned Enterprises Loans-to-Total Loans in Egypt 25Figure 2.6: Credit Extended to Private Sector in Egypt 26Figure 2.7: State-Owned Banks Share of the Banking System Total Assets in Egypt 29Figure 2.8: Urban and Rural Branch Density by Bank Type in Egypt 31Figure 2.9: Equity-to-Assets Ratio of Banks in Egypt 33Figure 2.10: Distribution of Staff in the Egyptian Banking System 38Figure 2.11: Return on Assets of Egyptian Banks 39Figure 2.12: Return on Equity of Egyptian Banks 39Figure 2.13: Collateral Requirements as a Percent of Loan Values 41Figure 2.14: Marginal Effects of Branching and Education on Access to Financial Services in Egypt 45


  • Introduction vii

    Figure 3.1: Equity Finance and Corporate Bonds as Sources of Investment Funding in Selected Emerging Economies 56Figure 3.2: Assessment of Enforcement in Egypts Capital Markets 60Figure 3.3: State-Owned Insurers Share of Insurance Assets in Egypt 63Figure 3.4: Funds under Management: Egypt and OECD 65Figure 3.5: Developments in Mortgage Loans in Egypt 71Figure 3.6: Volume and Number of Leasing Contracts in Egypt 74Figure 4.1: Legal Rights of Creditors in Egypt and Other Countries 82Figure 4.2: Cost to Create Collateral in Egypt and Other Countries 83Figure 4.3: Bankruptcy Costs and Time in Egypt


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