Consumer Finance in Egypt (Part 2)

How do people save?

As established in the previous installment of this series, the Egyptian population is largely unbanked. If Egyptians aren’t saving money in banks, how do they save?

There are a few institutional and cultural factors to consider. Firstly, the government only allows for a finite number of bank licenses, all of which have already been given out. This creates a high barrier to entry for starting a bank, as you have to acquire an existing license and handle the legacy infrastructure and bureaucracy from the previous bank. This prevents innovation and competition from new players.

Would Islamic Banking improve banking penetration?

Islamic banking only accounts for 6% of the country’s deposits. This is of note as it demonstrates that Egyptian’s concerns about banking are not religious aversions to interest-bearing instruments, but instead the inaccessibility and distrust of banking institutions. This is not true of all MENA countries. Islamic banking makes up over 30% of deposits in the Gulf Countries (GCC) such as Saudi Arabia, Kuwait, the UAE, and Iran. Interested parties must consider these differences between each country in the MENA region because they result in different saving behaviors.

How do the wealthy save?

Financial literacy across income levels is low. Most Egyptians have discomfort with the stock market* and other financial instruments. As a result, wealthy Egyptians opt to make long term investments in real estate as opposed to public markets. People generally buy units or land and either sell in 5–10 years or live off of the accrued rent indefinitely. Many wealthy Egyptians pass properties down to the next generation as a low-risk way to maintain the family’s wealth and income.

How do lower-income Egyptians save?

The saving landscape for low-income Egyptians is very different. Traditionally, low-income communities organize their finances around “gameyas”. A gameya is an agreement between a group of individuals to contribute a fixed monthly payment into a shared pot. One person withdraws the pot each month and the pot rotates based on a lottery system. For example, if 10 friends agree to contribute 100 EGP in a monthly payment for 10 months, the pot will hold 1000 EGP each month for the current holder. Gameyas rely heavily on social accountability, as Egyptians simply agree on terms based on social trust rather than an intermediary or legal document.

The main benefits of gameyas are:

• Accountability to save. Gameyas help individuals save in a consistent manner because they are held accountable to their community.
• A large payout. The person that gets the first payout has effectively taken an interest-free loan of 900 EGP that they have to pay back monthly. This can help with a major short term purchase. The last person, however, gets the benefit of a large payout many months later. This is less desirable, but the last individual still benefits from the accountability to save.

What have been some attempts at addressing the underbanked?

Over the past 10 years, several companies have attempted to scale this concept by building online gameyas which the company facilitates for a fee. Moneyfellows.com is the latest example of such a company. Thus far, all attempts have failed to build traction despite millions of investment dollars. The only fintech companies that have succeeded are payments based, such as Fawry. Fawry has point-of-sale machines distributed through thousands of locations–such as retailers, bodegas, pharmacies, and post offices–where users can pay their internet, cell phone, utility, and other bills in cash.

In contrast to these fintech companies, the Post Office has had more success addressing savings for a larger population. The Post Office’s has a much larger branch network than all the banks combined, which allows for financial inclusion in rural areas. Additionally, it is a more trusted institution because it is hyper-local and distributes government pensions and social security. Banque Misr (Bank of Egypt) partnered with the Post Office to provide savings accounts through their branches, which showed a huge increase in their deposits.

Since the country’s overall banking penetration remains between 10% — 15%**, Egyptians utilize unique and sometimes sub-optimal saving mechanisms. High-income Egyptians tend to save money in real estate investments and low-income Egyptians save within their local communities, either informally through gameyas or formally through the Post Office.

In part 3 I’ll discuss where there are opportunities to enter the market and some key aspects for new fintech companies to consider when entering the space.

*The Egyptian stock market is on occasion one of the highest performing stock markets in the world. Prior to the revolution in 2011, the EGX grew by 145%. However, it has been quite volatile amid the political unrest in the following years. The market is now stabilizing again and foreign investors are re-entering the market.

**Egypt’s data quality is very low. It’s estimated that over 50% of the economy is informal i.e unregistered small and medium enterprises (SMEs).