open sesame

Egypt’s Fintech faces obstacles to bring digital banking to fruition

In depth
This article is part of the dossier: Digital Africa

General view of hotels, banks and office buildings by the Nile River in Cairo, Egypt January 30, 2021. REUTERS/Mohamed Abd El Ghany

Nearly two thirds of Egypt's population of 102 million are without access to banking services. Slashing this number is a key prerequisite to integrate the country’s vast grey economy - whose financial activity is not taxed or monitored by the government - into the formal sector.

As of September 2020, Egypt ratified a new banking law that will allow, for the first time, the launch of digital banks.

Bylaws are still being prepared and should come into effect later this year. Thereafter, the Central Bank of Egypt (CBE) will start granting digital banking licenses, for which several traditional banks have already applied, according to media reports.

Early this year, Banque Misr – Egypt’s second largest state bank – appointed French multinational IT company Atos to build its digital bank, which is set to be the first-ever in the most populous Arab nation, after the CBE gave it a tentative thumbs-up.

What’s not certain yet is if Egypt will continue on the path of change and grant banking licenses to fintech companies, as is already the case in other countries in the region such as Saudi Arabia, where digital banks can be established by telecommunication companies.

Tech firms and non-banking institutions are already entitled to licenses from the CBE to operate e-wallets. Sherif el-Etr, a financial analyst focusing on fintech at investment bank Prime Securities, tells The Africa Report that allowing the launch of digital banks would certainly chart the way forward for expansion of financial inclusion across the country.

Greater banking accessibility

Efforts are already underway to cut down the number of people without banking services. Last year, the CBE ditched several requirements for individuals to open bank accounts, such as proof of residence and source of income.

The CBE has also waived requirements for written parental consent for adolescents: those aged between 16 and 21 – the age of majority – will now be able to open bank accounts on their own, a move that seeks to encourage more youngsters to be banked.

However, experts argue that real change can only come through increasing digital banking.

Such a breakthrough in financial inclusion would be better achieved through digital banks that can run without staff on site. These institutions can better serve the rural and less urbanised areas, where traditional bank branches are scarce.

“Going into digital banking, I think, will reduce the number of unbanked citizens, because it’s much easier” to open accounts or embark on other transactions, says the financial analyst.

Start-up penetration

Etr cites considerable countrywide reach of e-payment platforms, such as Fawry – Egypt’s largest fintech company – as well as Bee and Masary.

The latter two are expected to grow even more after Vodafone Egypt’s anticipated acquisition of a 20% stake in each firm, thanks to the mobile operator’s large network across the nation, he says. “I believe in the near future, areas that mostly had no financial solutions and e-payment services will have more of those.”

“Another sign of fintech expansion is the multitude of start-ups that were launched during the coronavirus [pandemic] and the funding they have been granted,” with various digital platforms springing up, he adds.

Last year, Egypt was ranked second in the MENA region – behind the UAE – in terms of venture capital investments, according to a report issued by Magnitt, an online community for start-ups in the region.

Higher adaptability

Technically, it’s easier to give a digital banking license to a small start-up than a lumbering bank, says Mahmoud Hamouda, a strategy and operations consultant at Dell Technologies.

It can take years to obtain a banking license…It’s not just Egypt; if you look across Africa you will find that this is a consistent pattern.

“When you look at the UK or the US, a company like Revolut or the new banks in the US, [they] managed to obtain the license faster than the large banks,” Hamouda, who is also the head of Dell for Entrepreneurs in Egypt, tells The Africa Report.  

The likes of “Citibank are still struggling with their digital strategies,” whereas “start-ups […] don’t have the bureaucracy of […] large banks, so it’s easier for them to comply with the regulatory requirements.”

However, there are numerous variables that could change these dynamics, Hamouda notes. “In Egypt, the flexibility of acquiring a banking license is not high, and it involves non-technical elements.”

Red tape, paperwork

Bureaucracy is a major obstacle in doing business: it leaves the Egyptian government with a mountain to climb, says Hamouda.

“It can take years to obtain a banking license,” he says. “It’s not just Egypt; if you look across Africa you will find that this is a consistent pattern,” Hamouda says, citing Nigeria and Ghana.

Overcoming the red tape in Egypt – with reference to digital banking – would require a great deal of cooperation between different authority levels such as the CBE, the investment ministry and the state security apparatus, he adds.

Another stumbling block to launching digital banks is paperwork. Egypt still abides by the Know Your Customer (KYC) standards – designed to curb fraud, corruption, money laundering and terrorist financing.

Digital banks can be attained in Egypt “only when the framework is complete,” Etr says. “Regulation-wise, customers still need to submit paper documents,” and banks ought to archive them, thus “the legislation still needs further amendments.”

Lack of cybersecurity

On the other hand, fintech firms in Egypt, “even the old ones that are now scaled-up have cybersecurity low on the agenda; they wouldn’t consider it unless they need it,” Hamouda says.

“All banking systems have much higher cybersecurity standards,” he says. For instance, to complete a transaction via the “National Bank of Egypt, HSBC or CIB, you must obtain two-factor authentication, a token.”

Conversely, Hamouda says, the authentication system of e-payment platforms like Paymob or PayTabs is intrinsically “weak”; and this is just the tip of the iceberg. “When you go through the seven layers of security, you will find a lot more vulnerabilities” that would preclude fintech firms from living up to the banking standards unless they’re addressed.

Far from financial inclusion

When it comes to financial inclusion, Egypt’s fintech community “is not doing good,” Hamouda says. “From a pure fintech perspective, they are heavier on technology than the general consumer base,” which is anything but immersed in fintech.

“When you look at the payment adoption, comparing Egypt with China, we’re not even on the radar. Alipay is everywhere [in China; it’s] better than the credit card … In the US, there is Google Pay,” says Hamouda.

“That’s not picking up in Egypt at all… Today, we’re still thinking that e-commerce would have other options than cash and delivery; we’re still far away from even thinking about financial inclusion through fintech.”

‘It will take time’

A study published by the International Labour Organisation (ILO) in 2018 shows that almost two thirds of jobs in Egypt were in the informal sector.

Up until 2018, according to official data, 53% of economic institutions in Egypt fell under the grey economy. Four million workers plied their trade at those entities, and comprised 29.3% of the overall workforce at economic institutions in the country.

Such a massive and deeply ingrained grey economy will be resistant to a transition in the formal sector, says Sherif Samy, chair of the Egyptian FinTech Association – a cross-industry initiative that seeks to facilitate collaboration in the fintech ecosystem.

“Predominantly, those who have businesses in the grey economy are trying to avoid the bureaucracy and [paying] taxes,” Samy, who is also the non-executive chair of Egypt’s largest private bank CIB, tells The Africa Report. “Now all the measures being taken to force people to do transactions [through digital] payment systems, including checks, bank accounts … [are meant] to reduce this grey economy, or force people to become more legit.”

“Think of doctors, even surgeons; don’t think only of traders and distributors,” he says. “It will take time because these people have been out of the system for decades.”