Egypt launches microfinance programme to contain informal economy

The Egyptian government has launched a microfinancing programme called “Nano Finance” to integrate the informal economy in the formal sector.

It aims at empowering economically marginalised people through financing mechanisms that improve their living conditions.

The Financial Regulatory Authority said terms and conditions for granting nano loans include a maximum of approximately $190 per individual to be reimbursed in three months.

Authority Executive Chairman Mohamed Omran said “nanofinancing, offered for the first time in Egypt, relies very much on digital technologies.” He added that “international experiences in microfinancing have shown the product is used essentially to meet requirements of marginalised groups and those most in need of financial services and suffer from difficulty in accessing financing.”

Microfinancing seeks to provide capital needs for small farmers and the self-employed, home-based projects, day-to-day sellers and street vendors and to encourage young people to enter self-employment.

Nano Finance is considered a tool to empower lifestyles of individuals because it directly promotes financial inclusion initiatives in a market dominated by cash transactions, away from formal financial systems.

One of the advantages of microfinancing is that it promotes reliance on insurances in society. For this reason, the Financial Regulatory Authority requires companies active in microfinancing to insure loans against non-payment risk. This promotes a culture foreign to most Egyptians.

Microfinancing companies are required to update client and loan data every two weeks. Hence, the Egyptian Credit Inquiry Company “iScore,” the only company responsible for credit reporting in the country, introduced a system of credit information via mobile phones to speed up data collection and reporting, reduce costs in a manner commensurate with the microfinance sector and enhance the latter’s integration into the formal economic system.

Egypt’s parallel economy is estimated at $154 billion, representing about 40% of GDP.

Economic analyst Yasser Amara said: “The Nano Finance product supports the poor class in Egypt, especially craftsmen who need a small capital to jump-start their professional life.”

He explained the financing offering improves codification of platforms for collective funding that have spread through social media without supervision or control. He pointed out that the main goal of Nano Finance is to legalise conditions of workers in the informal economy and integrate them into the formal system.

“Once the beneficiary obtains a loan from the microfinance companies, a quasi-database is created within the financing companies and the beneficiary becomes obligated to pay back in instalments and from there he can be taxed at a later stage,” Amara said.

For the system to succeed, Cairo is relying on the outcomes of experiences in India and Bangladesh. The system of Nano Finance may turn into a bank for the poor or for microfinance.

Egyptian billionaire Naguib Sawiris struggled to establish a bank for financing small projects in the country but Egypt’s Central Bank refused to grant licences to family banks, especially after the failed experiment of the private Nile Bank, now bankrupt, and which was owned by the El Ayouti family.

Sawiris said he was looking to acquire a bank outside Egypt and then open a branch in Cairo. He owns a controlling stake in Rifi Microfinance Company, which obtained from the Financial Regulatory Authority the first licence to practise microfinancing in Egypt.

Microfinance is one of the main mechanisms countries use to bring into the formal economy the thousands of informal economic actors. The government seeks to generalise the mechanism for craftsmen and those wishing to earn a living other than in government jobs.

More effective systems have been introduced to facilitate payments of loans through mobile phones. Users can either use a dedicated application or send text messages with the value of the daily instalment.

The National Bank of Egypt aims to implement the system in cooperation with the Alexandria Businessmen Association, whose umbrella includes a financial arm for micro-projects.

Because 99.9% of microfinance recipients repay their loans and because loans are quickly recovered, commercial banks have intensified efforts to offer the product. Banks can get grants dedicated for microfinancing from international institutions, which allows them to make significant profits.

Mohamed Nader, president of Archer Financial Consulting and Finance, said: “Nano Finance is an effective product for lifting a large segment of society out of poverty and opening financing horizons for small farmers and craftsmen.”

The poverty rate in Egypt is about 32.5%, which means that one-third of the population — more than 32 million people — is at the subsistence level.

Although the microfinance initiative focuses on marginalised groups, there are specific groups of professionals, such as doctors, real estate brokers and private teachers, who operate openly in the parallel economy and do not pay adequate taxes. Appropriate digital systems need to track such activities and integrate them into the formal economic system to increase the country’s resources for funding of health and education services.

source: Arab Weekly