Consumer Finance in Egypt (Part 1)

84% of people in the Middle East and North Africa don’t use banks, but banking is one of the most profitable sectors in the region.

Traditional consumer debt is non-existent in Egypt unless you are in the top 1%. The banked population is 14% (lowest in the world) while 4% have debit cards and only 2% have credit cards. Everyone, including the 1%, uses cash for major purchases like housing. Thus, consumer financial instruments like mortgage have minimal penetration. Instead, people buy houses on credit from the developers or with cash in the secondary market.

This low bank penetration is a symptom of a few factors

• Lack of trust in the financial sector (people keep money under their mattresses)
• High inflation rates (you are better off spending your money than saving it at the bank rates ~8% for savings vs 15% inflation)
• The large spread on loans by the banking sector (12% spread on loan)
• Aggressive bankruptcy laws (thousands of people are in jail with outstanding debts of ~1k EGP, $60)
• Low-risk tolerance from the banks (you have to be employed by the government or rich to get a loan)

However, despite the above, banks are still among the most profitable companies in the country. During both the Arab Spring and a 212% currency devaluation, banks not only managed to make a profit but also showed revenue and bottom line growth in real terms. Most other sectors in the country posted losses.

Given this interesting dichotomy, I want to explore the following questions throughout this series:

• How do middle-class people buy things?
• How do most people save if not in banks?
• Why most people don’t use banks?
• What is the competitive landscape?
• What are examples of Failed attempts at disruption?
• What are opportunities for fin-tech and start-ups in this market?

How do middle-class people buy things?

Egypt’s middle-class population ($300-$600 monthly income) uses installment plans directly from manufacturers and distributors. This form of financing is fairly prevalent and lucrative due to the high margin on interest rates. Why are consumer installment plans more prevalent and how does it avoid the pitfalls of credit cards and bank loans?

It is largely due to fear of perceived liability. Banks and consumer product companies enforce their recourse differently. Banks often take legal action and require customers to either pay their loans or file for bankruptcy. Bankruptcy laws in Egypt are very unforgiving. The sentences often include jail time until the debt is paid and a ban on starting a business for 10 years.

When a customer defaults on their installment plan, however, companies allow the customer to either sell the product to pay off the loan or return the product and forego the installments paid. In both of these scenarios, the customer never formally defaults. The customer’s credit score is unaffected and there is no risk of jail time. The company will then sell the product to a new customer as a used product at a price above the outstanding debt. This is a win-win for both the new buyer and the company.

Stay tuned for the next installment of this series!