Standfirst: Egypt’s banking sector is adopting socially responsible codes of conduct, business strategies and products, recognising that sustainability via sustainable finance projects are now critical to the emergence of developing and emerging market economies. It is estimated that only 5% of the commercial banking activities across MENA is directed towards SMEs. While, many governments in the region have scaled back capital spending in the wake of the collapse in oil prices, Egypt is keen to push ahead with its development programme. On the regulatory level, supervisory authorities in Egypt have been promoting financial inclusion to address barriers to financial access while assuring financial system stability.
Maintext: Egypt is at the forefront of developing sustainable finance solutions in the Middle East region with local institutions showing a ready willingness to dedicate specific resources, human and capital, to pursuing ESG-based (environment, social and governance) initiatives. Sustainable finance includes a strong green finance component that aims to support economic growth. Recently, Cairo has approved” The Sustainable Energy Strategy to 2035” in October 2016 which builds on previous strategies emphasising the importance of renewable power and confirms the target (established in 2008) for renewable sources to provide 20% of electricity generation by 2022, with the private sector expected to deliver most of this capacity. Scaling up renewable energy will help Egypt meet its climate change mitigation commitments as well as reducing the country’s fuel import bill and thus saving foreign exchange reserves. One of the ways Egypt is looking to attract investment in renewables investment is through its feed-in-tariff programme. The Central Bank of Egypt supports this policy by guaranteeing the financial obligations of the Egyptian Electricity Transmission Company under buy-back contracts with private firms who, in turn, are supported by a willing banking sector providing the finance necessary to get these projects going. On another front, the Ministry of Agriculture has launched initiatives, again supported by local financial institutions, to encourage the recycling of agricultural waste and to eliminate the “Black Cloud” phenomenon. Each year in October/November, the air becomes thick with pollutants resulting from the burning of rice straw. This event is believed to cost the Egyptian economy around 1.5% of its GDP.
The financial sector has a critical role to play in this process. It can (I) re-orient investments towards more sustainable technologies and businesses (II) finance growth in a sustainable manner over the long-term (III) contribute to the creation of a low-carbon, climate resilient and circular economy.
Today, at the region’s most populous country, the authorities have taken several steps to facilitate SMEs' access to finance. Improvements in the financial policy framework encompassed financial inclusion. Despite the higher risk associated with SME lending, the Egyptian banks will overall benefit from the development as it will help to diversify over time their concentrated balance sheets and revenue sources. These regulations include certain levels of protecting debtor rights, creditworthiness checks, transparency, caps on microfinance loans for each customer, and regulations on how MFIs may advertise their products, among others. While financial inclusion has just taken off in Egypt, we believe that this is the way to improved employment and lower poverty rates in line with the UN Sustainable Development Goals (SDGs).
SMEs could be a transformative force in MENA economies if they are given the right environment to thrive. A number of factors hinder the performance of SMEs, including a difficult business climate, ineffective regulatory and legal procedures, and a lack of access to finance. SMEs are often considered the main source of employment growth. In Egypt, there are around 6.4 Million MSMEs (out of which only 460,000 are formal) representing 75% of the total employed workforce and 99% of non-agricultural private sector establishments. The Credit Gap is estimated to be USD 11 BN . (IFC 2017) . Despite their importance, they are still facing several problems, in particular access to finance which a typical challenge in developing countries. In most OECD countries, SMEs account for more than 95% of enterprises and up to 70% of employment. The growth of SMEs is critical to raising and diversifying economic growth in Egypt.
For the financial services sector, it can be said that financial inclusion is both a societal challenge and a business opportunity – a win-win situation in the long run. In many countries, corporate social responsibility has become a part of the development,marketing and external communication strategies of financial institutions. Corporate social responsibility is an umbrella term that includes, among others, a focus on marginal and disenfranchised customers.Financial service providers need customers who are informed, confident and have at least access to basic banking services. With low banking penetration levels in the MENA region, financial service providers have a role in expanding their reach. As the newly banked become more participative in society, they will become potential customers for other financial services products, increasing the size of the overall market and income levels. On the industry level, and as business to this segment scales up, this will also help the move away from paper based financial transactions to digital ones, reducing costs across the industry.
To promote financial inclusion, the GoE has ratified a microfinance law in November 2015 after several years of delay. Also, the Central Bank of Egypt is now encouraging bank lending to SMEs by reducing the cost of funding. At the macro level, the CBE has initiated a working group led by the Egyptian Banking Institute on developing a financial inclusion strategy, examining what policies and activities are needed to help financial service providers and regulators promote financial inclusion within their respective mandates. This strategy aims to increase lending to SMEs to about 20% of total loan books of banks by 2020. Hopefully, the amount of credit growth will correspond to broadening availability of financial services.
Another example is the MOSTADAM initiative; the first platform to promote sustainable finance in the MENA Region. Recognising the historical shortcomings of the financial services industry in developing socially responsible policies, MOSTADAM is focused on capacity building, advocacy and advancing sustainable products and services. Measuring the success of these efforts against a global benchmark is not only critical in driving product development strategy, but necessary to demonstrate the innate benefits to potential partners, customers, regulators and government.
To this end, the Federation of Egyptian Banks joined the Sustainable Banking Network (SBN) in November 2016. Representing 38 member banks, FEB is affiliated with the Central Bank of Egypt. The SBN is a global, voluntary community of financial regulators, banking associations and environmental regulators from emerging markets interested in advancing sustainable finance based on national context and priorities, as well as international good practices.
Conceptually speaking, a challenge that nearly all the institutions face is the lack of scale for applying modern banking techniques related to issues such as robust and scalable IT systems, management information systems, customer relationship management, risk management and access to financial markets, which is needed for effective financial mediation to large groups of clients.
Creating a sustainable financial environment is not an end in itself. It is the only way to reach significant scale and impact far beyond what governments can fund. Achieving financial sustainability means reducing transaction costs and offering better products and services that meet client needs. This will allow the continued operation of the finance provider and the ongoing provision of financial services.
Because the economic sectors are strongly interrelated, they should be integrated in the same financial system in order to achieve long-term economic growth.