amcham egypt inc - finance chap 1.qxp layout 1 1/16/20 2 ... files...“we remain positive on egypt....

Finance chap 1.qxp_Layout 1 1/16/20 2:32 PM Page 1

©2019 AmCham Egypt’s Business Studies & Analysis Center. All rights reserved. Unauthorized reproduction, copying, re-mailing, storage or website posting is prohibited. All information in this publication is verified to the best of the author’s and the publisher’s ability.

Khaled Sewelam Director, Research and Publications

Amira Sheha Research Manager

Fadila Noureldin Author and Senior Economic Researcher

Kate Durham Editor and Head of Corporate Publications

Nessim N. Hanna Senior Art Director

Emy Emile Senior Graphic Designer

Verina Maher Graphic Designer Amany Kassem

Advertising & Business Development Director Publications/Research

Lamia Seleit Advertising Specialist Rowan Maamoun

Advertising & Ad Traffic Coordinator Hani Elias

Production Supervisor

Backed by strong legislative reforms and an improving macroeconomy, Egypt’s financial sector holds a treasure chest of opportunities. The latest edition of

AmCham Egypt’s Financial Services Industry Insight looks at all aspects of the sector from banks to insurance to the capital markets, and more.

The issue starts with a look at the macroeconomic progress of the past three years, with the latest data from Egypt’s economic turnaround, an assessment of potential challenges and the reform plan going forward. This is followed by a chapter on the insurance sector’s growing potential and a third chapter covering the key drivers behind the banking sector’s expanding investment. Chapters four and five offer updates on the closely related topics of financial inclusion and fintech, detailing the role of retail lending, e-banking and non-banking channels in drawing more consumers and SMEs into the financial system. Finally, chapter six has the latest on trends in the stock market, with a special look at private equity and Egypt’s new sovereign wealth fund.

Industry InsightMACROECONOMIC

Momentum EGYPT’S FINANCE SECTOR Set to soar:

INSURANCE Still Untapped

4

13

BANKS BREWINGBusiness 19

CRACKINGConsumer Credit

FINTECH ISFlourishing

26

34

EXPLOITING Sovereign Capital 45

CAPITALCrunch39


Egypt’s three-year International Monetary Fund (IMF)-backed reform program wrapped up in November 2019 after executing rigorous fiscal consolidation and extensive financial and currency reforms. The program significantly improved the country’s macroeconomic fundamentals and

boosted its fiscal and external accounts, landing Egypt a primary budget surplus in FY 2017/18 for the first time in 15 years. Harvard University’s global growth projections listed Egypt as the world’s third fastest economy (and Africa’s second) in 2018 with a growth rate of 5.3%, following India and Uganda. According to UK-based newspaper The Economist, Egypt maintained its spot in Q1 2019, posting an estimated GDP growth of 5.6%, just 0.2% shy of India’s and 0.8% away from China in first place.

MACROECONOMICMomentum


The economic uptick has resonated with the interna-tional market. “Egypt has been on top of global investors’ lists for growth prospects,” says Akef El Maghraby, vice chairman of state-owned bank Banque Misr. “This has been reflected in portfolio investments, more specifically bills and bonds. The majority of reserves are long-term funding sources, which also bodes really well for the country’s growth story.”

“We remain positive on Egypt. The country has been reaping the benefits of [implementing] a significant reform agenda and a massive currency devaluation,” Bassel Khatoun, director of portfolio management for frontier and MENA at Franklin Templeton Invest-ments, told Zawya in May 2019. “Fiscal consolidation, supported by subsidy cuts and more comprehensive tax revenues, have restored confidence in its medium-term outlook.”

Currency affairs Until 2018’s end, the Egyptian pound (EGP) remained relatively stable, trading between EGP 17.80-18.35 to the USD, compared to its pre-float level of EGP 8.88. The currency began an appreciation rally in 2019, rising by a monthly average of 1.3% and settling at a three-year high of EGP 15.97 to the dollar in December 2019, outperforming most currencies in

2019 with a cumulative appreciation rate of 11.3% in 2019. In August, Bloomberg ranked the EGP as the second-best performing currency in 2019 following the Russian ruble, which gained 9.5% in the first seven months of the year, and ahead of the Thai baht (5.3%) and the Philippine peso (2.8%).

The majority of analysts credit the appreciation to tangible changes in Egypt’s financial accounts, including an improvement in rentier resources such as tourism, exports and remittances, along with slight improvements in foreign direct investment (FDI).

The recovery of portfolio inflows also drew more FX to the country. A July 2019 World Bank report noted, “Net foreign assets [NFAs] in the overall banking sys-tem [are] bouncing back after a steep decline,” which was triggered by a global emerging markets (EM) selloff in mid-2018. The selloff prompted a USD 11.1 billion outflow in commercial banks’ NFAs, with the deficit bottoming out in November 2018 at USD 7.4 billion (down from a net inflow of USD 3.2 billion in November 2017). The carry trade also bounced back in 2019, which helped push the currency up further. “Investors have netted themselves a 23% return on EGP-denominated bonds [in 2019] — five times the EM average... carry traders investing in Egyptian debt with USD have made returns of around 15% in 2019,” Bloomberg reported in June.

6. AmCham Industry Insight

Macroeconomic Momentum

Egypt Macroeconomic Progress Tracker

Sources: MOF, CBE, Moody’s, S&P, Fitch

GDP growth 2.9% 5.6%Budget deficit (share of GDP) 12.0% 8.4%Foreign reserves USD 16.7 billion (June 2014) USD 45 billion (August 2019)Net portfolio inflows USD 1.2 billion USD 4.2 billion

FY 2013/14 FY 2018/19

n Macro Indicators

n Long-Term Sovereign Credit Rating

Rating (outlook) Date Rating (outlook) DateMoody’s B3 (stable) Apr 07, 2015 B2 (stable) Sept 1, 2019S&P B- (stable) Nov 13, 2015 B (stable) May 11, 2018Fitch B (stable) Dec 19, 2014 B+ (stable) Nov 26, 2019

Pre-2016 Post-2016


4.4 4.3 4.2

7.0

0.10.80.4

2.2

-1.2

0.60.8

1.4

1.2

2.5 2.5

1.2

3.8 3.4

1.1

0.50.3

0.2

-1.6 -1.3

1.7

1.9 2.31.1

1.0 1.06.5

6.05.65.3

FY14/15

FY15/16

FY16/17

FY17/18

FY18/19

Preliminaryactual

FY19/20

Budget

FY20/21

Forecast

FY21/22

Forecast

FY 12/13 FY 15/16 FY 16/17 FY 17/18 FY 18/19Preliminary

actual

FY 19/20Budget

InvestmentFinal consumptionPrivate consumption

Public consumptionPrivate investmentsNet exports Public investments

Real GDP Growth (%) Contribution to GDP Growth (%)

Overall Deficit and Primary Balance

Revenue Breakdown

Overall Debt (local and foreign)

16.5%

12.5% 12.7%11.4%

8.2% 7.2%

-8.4%

-4.6% -3.7%-2.3%

2.0% 2.0%

FY 13/14 FY 14/15 FY 15/16 FY16/17 FY 17/18 FY 18/19Preliminary

actual

FY 19/20Budget

Overall deficit (share of GDP)Primary balance (share of GDP)

FY 13/14 FY 14/15 FY 15/16 FY 16/17 FY 17/18 FY 18/19Preliminary

actualTax revenues Non-tax revenues Other

Total RevenueEGP 456.7mn






Average Debt Maturity (years)

1.9 1.9 1.92.5

3.34

4.45

FY14/15

FY15/16

FY16/17

FY17/18

FY18/19

Preliminaryactual

FY19/20

Budget

FY20/21

Forecast

FY 21/22

Forecast

85.2%94.9%

90.0%78.2%

72.3%67.7% 65.7% 64.2%

7.8%7.9% 18.0%

19.0% 18.0% 15.3% 14.3% 13.3%

93.0%102.8% 108.0%

97.2%90.3%

83.0% 80.0% 77.5%

FY14/15

FY 15/16

FY16/17

FY17/18

FY18/19

Preliminaryactual

FY19/20

Budget

FY20/21Target

FY21/22Target

Local debt (share of GDP)

External debt(share of GDP)

Total debt(share of GDP)

1,000

800

600

400

200

9.8%

. 7AmCham Industry Insight

Breaking Down Egypt’s Turnaround n Macroeconomic Fundamentals

n Fiscal Performance

Sources: MOF, CBE


Current Account Deficit (excluding official transfers) Service Receipts (EGP billion)

Net International Reserves FDI Inflows

7.2

14.7 14.8

19.9

14.5

6.28.2

6.2

2.5%

4.9%4.5%

6.0% 6.2%

2.5% 2.5%1.8%

FY12/13

FY13/14

FY14/15

FY15/16

FY16/17

FY17/18

FY18/19

Preliminaryactual

FY19/20

Forecast

Current account deficit (EGP billion) Share of GDP

FY12/13

80

60

70

40

50

20

10

30

FY13/14

FY14/15

FY15/16

FY16/17

FY17/18

FY18/19

Preliminaryactual

Workers' remittances Oil exports Non-oil exportsSuez Canal receipts Tourism receipts

EGP53.6 bn

EGP53.0 bn EGP

50.3 bn EGP44.7bn

EGP52.8 bn

EGP72.0 bn EGP

67.8bn

16.720.1

17.5

31.3

44.3 44.9 45.0

3.33.9 3.7

6.4

8.48.0 8.0

FY13/14

FY14/15

FY15/16

FY16/17

FY17/18

FY18/19

Aug-19

Net International Reserves (USD billion)Import coverage (# of months)

10.912.4 12.5

13.4 13.213.7

4.26.4 6.9

7.9 7.85.9

FY13/14

FY14/15

FY15/16

FY16/17

FY17/18

FY18/19

Total inflows (USD billion)Net inflows (USD billion)

14.3%

17.216.2

1513.4

12.512.3

12.915.9

16.7 17.418.718.9 19.3

13.3%12.4%

10.5%10.0%

9.0%

10.4%11.2%

11.6%12.0%

12.5%12.4%

11.8%

Nov-18

Dec-18

Jan-19

Feb-19

Mar-19

Apr-19

May-19

Jun-19

Jul-19

Jul-18

Aug-18

Sep-18

Oct-18

Net foreign holdings of T-bills (USD billion) Share of total holdings

Egypt12.1%

Russia10.7%

South Africa1.5%

Thailand1.5%

Israel2.6%Mexico

6.0%

Peru1.5%



n Foreign Holdings of T-bills n Top Carry Trade Returns (as of June 2019)

n EM Average = -0.6%

n External Accounts

Sources: MOF, CBE, Bloomberg



Others believe the EGP’s appreciation was a result of low demand for FX during H1 2019 rather than in-creased portfolio inflows. “It’s a matter of seasonality. But seasonality won’t be as supportive to the EGP in Q4 [2019] when demand for FX typically picks up ahead of the new year and foreign investors look to repatriate profits,” EFG Hermes’ head of macroeco-nomic analysis Mohamed Abu Basha told local media in June. The pound’s good run was also predicted to end gradually when the Central Bank of Egypt (CBE) resumed monetary easing, and more foreign profit

repatriation triggers a currency depreciation. The CBE cut key interest rates by 350 basis points over three rounds in the last five months of 2019, but the currency has yet to succumb. Still, some experts believe the EGP rally may not be long-lived: “The CBE could decide to allow the currency to weaken slightly to turn around tight financial conditions,” Bilal Khan, Standard Chartered’s senior economist for MENAP, told Bloomberg in October. In December, investment bank Beltone Financial forecast the EGP would see limited volatility in 2020, within the EGP 15.90-60 range.

Addressing long-lived fiscal imbalances has been a cornerstone of Egypt’s reform program. On average, the overall fiscal and primary deficits have been as high as 10% and 3% of GDP, respectively, over the past 15 years. The budget gaps peaked in FY 2012/13 with overall and primary deficits of 12.9% and 5% of GDP, respectively, raising red flags over the sustainability of Egypt’s fiscal policy and its general financial well-being. In 2016, the government began sweeping fiscal reforms on both sides of the balance sheet. To boost revenues, the 10% general sales tax was replaced in September 2016 with a 13% Value Added Tax (VAT), which increased to 14% the follow-ing year. The VAT’s rate hike accounted for 60% of the increase in total tax revenues in FY 2017/18. Cuts in expenditures targeted subsidy spending, which in FY 2016/17 exceeded EGP 240 billion (USD 13.5 billion) and accounted for about 20% of the budget. The government began removing subsidies on utilities, energy and transportation and also restructured its commodity subsidy system to minimize fund leakage, cutting overall subsidy spending by 30% year-on-year in FY 2018/19 to EGP 85 billion (USD 4.9 billion). In

FY 2019/20, the state budgeted for 40% and 75% further cuts in fuel and electricity subsidies, respectively. “The IMF rarely gives credit to a country but has given credit to Egypt’s progress in its fiscal accounts on many occasions,” says Banque Misr’s El Maghraby. “This has definitely resonated with foreign investors on many fronts.”

Egypt’s financing gap rang in at EGP 715 billion (USD 42.1 billion) in FY 2018/19, while its primary surplus rose to EGP 104 billion (USD 5.8 billion) and took up 2% of GDP. Despite the improvement, the Ministry of Finance (MOF) expects the gap to widen to EGP 820 billion (USD 50 billion) by the end of FY 2019/20 on the back of increased spending on education, health and social protection programs.

To plug the gap, the government has relied on local and international debt issuances – a strategy that will remain in place over the medium term. Egypt has raised USD 22 billion from eurobond issuances since the beginning of 2017, beating all of its African peers and most emerging markets (after Turkey and Argentina). In May 2019, the government raised the cap on eurobond issuances to USD 42 billion until the end of FY 2021/22.

Fiscal payoffs

Source: MOF

Medium-term Economic Targets

GDP growth (%) 6.0 6.4 7.0Inflation (%) 10.5 9.1 8.0Budget deficit-to-GDP (%) 7.2 6.2 4.7Public debt-to-GDP (%) 90.5 80.0 77.5

FY 2019/20 FY 2020/21 FY 2021/22




The state is looking to diversify its financing sources beyond eurobonds. In March 2019, the government announced it was studying the possibility of a local is-suance of green bonds—lower-yield bonds that finance climate and environmentally friendly projects. Other new debt instruments on the table include yen- and yuan-denominated bonds (also known as Samurai and Panda bonds) and sukuks (Islamic bonds). While a spe-cific timeline has not been set, the plan is to raise USD 250-500 million from Asian markets in FY 2019/20.

Government officials met with local banks in May 2019 to plan for a sovereign sukuk issuance worth up to USD 1.5 billion, tentatively slated for early 2020. Also in May, the government began talks with China-led Asian In-frastructure Investment Bank to issue its first interna-tional infrastructure bond, a debt instrument used to finance infrastructure projects in H2 2019/20. The state’s plan is to raise USD 3-7 billion overall from inter-national markets in FY 2019/20, with 70% earmarked for USD-denominated eurobonds.

Egypt’s Eurobond Timeline

2018

2019

USD 4 billion• USD 750 mn: 5-year bonds yielding 6.2%• USD 1.75 bn: 10-year bonds yielding 7.6%• USD 1.5 bn: 30-year bonds yielding 8.7%• 5.4x oversubscribed

February

USD 2 billion• USD 500 mn: 4-year bonds yielding 4.55%• USD 1 bn: 12-year bonds yielding 7.05%• USD 500 mn: 40-year bonds yielding 8.05%• More than 7x oversubscribed

November

EUR 2 billion• EUR 750 mn: 6-year bonds yielding 4.75%• EUR 1.25 bn: 12-year bonds yielding 6.375%• 4.5x oversubscribed

April

2017

USD 4 billion• USD 1.75 bn: 5-year bonds yielding 6.125%• USD 1 bn: 10-year bonds yielding 7.50%• USD 1.25 bn: 30-year bonds yielding 8.50%• 3x oversubscribed

January

USD 3 billion• USD 750 mn: 5-year bonds yielding 5.45%• USD 1 bn: 10-year bonds yielding 6.65%• USD 1.25 bn: 30-year bonds yielding 7.95%• 3.7x oversubscribed

May

2015USD 1.5 billion• 10-year bonds with a coupon rate of 5.875%• 3x oversubscribed

June

USD 4 billion• USD 1.25 bn: 5-year bonds yielding 5.58%• USD 1.25 bn: 10-year bonds yielding 6.59%• USD 1.5 bn: 30-year bonds yielding 7.9%• 3x oversubscribed

February

EUR 2 billion• EUR 1 bn: 8-year bonds yielding 4.75%• EUR 1 bn: 12-year bonds yielding 5.625%• 3.8x oversubscribed

April

Note: no eurobonds were issued in 2016. Source: MOF



Credit agencies cite large financing needs, rapid accumulation of foreign debt and weak debt affordability as their main concerns about Egypt’s long-term outlook. As of FY 2018/19’s end, Egypt’s external debt stood at USD 108.7 billion, up 17.3% year-on-year. At nearly 40% of GDP, this puts Egypt among the top three countries globally with the biggest foreign debt stock. In September 2019, Moody’s rated Egypt’s fiscal position as “very weak” due to the government’s fi-nancing needs. The global credit agency forecasted interest payments will con-tinue to eat up about 45% of fiscal revenues over the medium to long terms.

In an August research note, Capital Economics acknowl-edged that the sharp rise in external debt is a cause for alarm but sees Egypt’s debt risks are contained. According to the research house, the CBE’s efforts to shore up FX reserves mean Egypt can cover its external financing needs for the next year, espe-cially with a narrowing current account deficit and the EGP’s appreciation.

Meanwhile, the government is working to reduce its substantial debt service bur-den. Following a 2015 strategy that was dropped, the MOF rolled out a Medium Term Debt Management Strategy (MTDS) in April 2019. The new four-year strat-egy aims to trim public debt levels to less than 80% of GDP by the end of FY 2021/22 by extending maturi-ties on government debt and lengthening the aver-age life of debt stock to reduce refinancing risks. To mitigate currency fluctuation effects, the MTDS is pushing for more EGP-denominated borrowing from international institutions. The strategy also seeks to stimulate GDP growth by cracking down on informal businesses to widen the formal economy.

The IMF’s April 2019 fourth and penultimate review of Egypt’s extended fund facility pointed to factors that could derail the government’s reform targets: oil price fluctuations, the population’s overall “economic adjustment fatigue” and continued population

growth, which will boost social protection spending. The government is working to address these risks on multiple fronts. For example, to hedge against sudden upticks in global commodity prices and/or average interest rates, the MOF set up a EGP 68.2 billion (USD 4 billion) contingency fund in its FY 2019/20 budget. Also, the MOF and Ministry of Planning and Admin-istrative Reform agreed to a USD 110 billion cap on foreign debt by 2021.

Gradually declining FDI over the past two years has some worried about Egypt’s growth prospects and busi-ness environment’s attractive-ness. After peaking at USD 8.1 billion in 2016, net FDI fell to USD 7.4 billion in 2017 de-spite the government’s rollout of the Investment Act in May. FDI inflows dropped 8.2% to USD 6.8 billion in 2018, with the majority of investments in the oil and gas sector. During H1 2019, FDI continued falling 22.5% year-on-year to USD 3.1 billion.

Experts point out that a global investment drop is largely hampering foreign capital inflows. The United Na-

tions Conference on Trade and Development (UNC-TAD)’s World Investment Report 2019 indicates global FDI hit its lowest level since the 2008 global financial crisis, falling 13% year-on-year to USD 1.3 trillion. FDI levels in developed economies were hit the hardest, plunging by 27% to USD 559 billion—their lowest since 2004.

Looking regionally, Egypt has remained Africa’s number one investment destination for the third consecutive year, according to Rand Merchant Bank’s 2020 investment report. And in terms of the business environment, the country continues to im-prove. Egypt ranked 114 out of 190 countries in the World Bank’s Doing Business 2020 report, jumping six spots from the previous report and gaining spe-cial mention as being among 42 countries to have implemented regulatory reforms that facilitated doing business.

Ongoing concerns

EGP 32.2 bn (USD 1.9 bn)

Energy subsidies

Public wagesEGP 21.2 bn(USD 1.2 bn)

Miscellaneous goods, services & investment needs

EGP 14.8 bn (USD 870 mn)

MOF Contingency Fund Breakdown

Source: MOF




The government is pushing for a 20-25% increase in FDI to USD 8-8.5 billion by the end of FY 2019/20. To draw investor interest, the government wants to contain internal pressures such as inflation and high interest rates, and streamline policies in value-added and technology-oriented sectors that contribute to eco-nomic growth and job creation. The government’s medium-term goals target USD 20 billion in FDI by FY 2021/22.

Planning post-IMF The IMF’s financial support has officially ended, but the government’s reform package is ongoing. And while Egypt’s policymakers have shown commitment to achieving the IMF’s macro-financial targets, inter-national and local investors have voiced concerns about Egypt’s status following the program’s comple-tion. Since the mid-1970s, Egypt has repeatedly re-turned to the IMF to seek fixes for problems that persist to this day—which may signal this won’t be its last call for international support.

In June 2019, the government began talks with the IMF for a non-loan program to set a roadmap for Egypt that would likely last for two years. In October, the IMF’s Middle East and Central Asia Director Jihad Azour announced future engagements would focus on facilitating higher private sector participation,

strengthening welfare provisions and increasing the transparency of state organizations. “For us, it's very important that the next wave of reforms will address some of the impediments to growth by reforming the business environment, allowing the private sector ac-cess to greater market share and by improving the en-vironment for doing business in Egypt," he told local media. According to the MOF, the government could reach an agreement with the IMF by March 2020.

“Egypt has worked to substantially reduce its country risk over the past three years since starting the pro-gram,” says El Maghraby. “Improving its macroeco-nomic framework has been imperative to tackling the crucial microeconomic issues currently on the govern-ment’s agenda like bureaucracy, red tape and ease of doing business. When these issues are tackled, we’ll see an even bigger impact on Egypt’s economic performance and growth prospects.”

Egypt’s Areas of Improvement in Doing Business 2020 (rank out of 190)

Source: World Bank

• Improved “one-stop shop” system.• Abolished requirement for businesses to obtain a certificate of non-confusion [related to company name].

• Excess supply available for exportation. • Installed automated systems to monitor and report power outages.

• New regulations require shareholder approval when issuing new shares on the stock market.

• Introduced an online system for filing and paying corporate income tax and VAT.


While insurance has been a major component of the global economy since the 1950s, it has been adopted by regional economies in waves. World War II activated mass automobile production in North America and Western Europe, triggering a boom in the motor insurance business that

sparked a domino effect on other insurance subsectors. Developed Asian markets followed in the 1960s and 70s due to soaring household savings levels and the development of Japan’s pension social security system. Emerging Asia began to see its biggest contribution to insurance following the 2008-09 global financial crisis, becoming the biggest driver of global insurance growth since 2010 and representing nearly 90% of total emerging-market insurance premiums. The Middle East (including Turkey) has been at the other end of the spectrum, accounting for less than 3% of emerging economies’ gross written premiums (GWP), with the United Arab Emirates (UAE) and Saudi Arabia leading the region.

INSURANCE Still Untapped


According to the global advisory firm Ernst & Young, in-surance growth in mature markets has been tapering off over the past decade due to high insurance density and penetration rates. In response, global insurers are turning to emerging economies due to their growing urbaniza-tion, rapid technological transformation, regulatory changes and introduction of micro insurance. And Egypt has become an increasingly attractive market.

According to a February 2019 Moody’s report, Egypt’s insurance sector is full of “untapped potential” as one of the largest Arab markets with a high consumption base and prevalent risk factor. The credit agency also pointed to improving economic fundamentals and promising regulatory developments in the sector as factors driving strong, profitable growth in insurance revenues over the short to medium terms. “The insurance sector’s perform-ance is reflected quite well in the figures: GWP grew 20% to EGP 29 billion [USD 1.7 billion] in FY 2017/18 over EGP 24 billion [USD 1.3 billion] the year before,” says Alaa El-Zoheiry, managing director of gig - Egypt and chair-man of both the Insurance Federation of Egypt and Am-Cham Egypt’s Insurance Committee. According to

preliminary data from the Financial Regulatory Authority (FRA), GWP have continued growing, up 19% to EGP 35.2 billion (USD 2.1 billion) in FY 2018/19.

Egypt activated its insurance market in the early 1900s, but it remains miniscule with an insurance density (the ratio of premiums to population) of less than EGP 500 (USD 30) per person and a penetration rate (the sector’s contribution to non-oil GDP) of 0.8%. These indicators pale in comparison to global and regional peers. Accord-ing to an October 2019 Economist Intelligence Unit re-port, Egypt’s insurance premiums represent less than 0.5% of total world premiums.

Egypt’s insurance market comprises 28 local and 10 foreign companies operating in the life and non-life seg-ments, along with 22 bancassurance providers. The non-life segment continues to take up about 65% of the market in terms of premiums value, while the life seg-ment accounts for the remaining. Of the 38 insurance companies operating in the market, three are state-owned and the rest are privately owned with local, re-gional, European and U.S. shareholders. The public sector players include Misr Insurance Company (MIC) and Misr Life Insurance Company (MLIC), both founded in the early 1900s as Egypt’s first insurers and among the first in the Arab world. In 2006, MIC and MLIC became subsidiaries of the newly created Misr Insurance Holding Company (MIHC).

The insurance sector has shown consistent growth over the past five years yet has gained minimal momentum in comparison to its potential. “According to a 2019 Swiss Re report, Egypt is ranked 10th in terms of insurance pre-mium gaps, with a USD 2.8 billion gap in premiums,” notes El-Zoheiry, which means that the sector currently addresses less than 40% of the insurable market.

AED 4,753(USD 1,293)

Density

2.2% of GDPPenetration

EgyptKSA*UAE*

SAR 244(USD 65)Density


EGP 500(USD 30)Density



Insurance Still Untapped

Egypt GWP Forecast

Source: Fitch Solutions

Total GWP (EGP billion) 29.0 30.6 32.6 34.5 36.3 38.3

Total GWP (y-o-y change) 6.2% 5.5% 6.5% 5.8% 5.2% 5.5%

Gross Life Premiums (EGP billion) 12.1 12.6 13.5 14.2 14.9 15.6

Gross Life Premiums (y-o-y change) 5.2% 4.1% 7.1% 5.2% 4.9% 4.7%

Gross Non-Life Premiums (EGP billion) 16.9 18.0 19.2 20.3 21.5 22.6

Gross Non-Life Premiums (y-o-y change) 7.0% 6.5% 6.7% 5.7% 5.9% 5.1%

Regional Insurance Metrics

*As of 2017 Source: Central Bank for each country



According to Basel El Hini, MIHC’s chairman and manag-ing director, the industry’s biggest challenge is stagna-tion caused by limited con-sumer awareness. “People have no concept of how im-portant insurance is as mode of saving,” El Hini told busi-ness news portal Enterprise in February 2019. As a result, “the market for insurance isn’t [exponentially] growing. All of the players, public and private alike, are fighting for market share in a market that is con-strained in size.”

“Lack of consumer aware-ness is a showstopper for the business because consumers still don’t see the true value of insurance policies in raising their standards of living and helping them mitigate per-sonal, political or business risks,” elaborates El-Zoheiry. “Insurance can protect a family when its breadwinner passes away and a claim is distributed as part of the deceased’s policy benefits, helping the family pay for education and its other financial commit-ments. Equally, when a factory owner buys insur-ance coverage against fire, flooding and/or other physical damages to assets, the insurance claim can help restart factory operations at minimal business losses.”

Low income levels may also be depressing de-mand for insurance. According to state statistics agency CAPMAS, Egypt’s average annual house-hold income is just shy of EGP 60,000 (USD 3,615), with 32.5% of the population living below the monthly poverty line of EGP 735.5 (USD 44.28). And while insurance is predominantly beneficial for lower-income earners, small salaries coupled with insurance illiteracy drives families to allocate their spending elsewhere.

Egypt’s insurance industry may see a notable change of pace as market dynamics evolve and pending legislation moves forward. The FRA and the Insurance Federation of Egypt have worked in tandem to improve consumer awareness and make

insurance more accessible to income-constrained households. In 2018, the two organizations launched a three-month media campaign with pro-motional videos designed to attract C- and D-class consumers to the market. An integral part of the campaign involved raising awareness about micro insurance, which operates jointly with microfinance and can provide policyholders with coverage of up to EGP 50,000. “The campaign worked very well,” El-Zoheiry explains. “To date, EGP 1.3 billion [USD 76.5 million] was injected into micro insurance cer-tificates from a presidential initiative that grants holders EGP 50 in insurance for every EGP 500 they deposit into [designated savings] certificates.”

Another presidential initiative, called “Aman,” was rolled out in Q1 2018 as a partnership between MLIC and local banks to offer micro insurance to casual la-borers, farmers and working single mothers. One certificate is worth EGP 500 and individuals can buy up to five certificates. Depending on the number of certificates held, beneficiaries receive up to EGP 50,000 in the event of the policyholder’s death or up to EGP 250,000 in the event of an accident. The payout can be taken as a lump sum or as a monthly pension of EGP 1,000-3,000 for up to 10 years.


Since the beginning of 2018, micro insurance policies have grown to about 1 million, half of which cover microloans. There are about 3 million microfinance loans in Egypt, meaning micro insur-ance covers about 15% of the microfinance market. “We are working to make this a 1:1 ratio,” El-Zo-heiry says.

Also in the pipeline is the FRA’s Insurance Act, which has been in the works since October 2017. To reduce risk and raise consumer confidence in in-surance policies, the impending legislation creates an industry bailout fund to pay off policyholders in the event the underwriter defaults. SMEs will also be granted incentives such as lower fees to lure them into the market.

“The most important feature of the law was the mandate of making more than 20 insurance prod-ucts compulsory, including professional liability in-surance for liability-prone professions such as doctors, architects, lawyers and external auditors, as well as public liability venue coverage,” El-Zo-heiry says. “These mandates are part of regional and developed insurance markets in Europe and the U.S. and are integral to raising consumer awareness and growing the sector.”

The final draft of the law, which is currently being reviewed by Cabinet, also raises minimum capital requirements for insurance companies in the life and property sectors by 150% to EGP 150 million (USD 8.8 million) and doubles the ceiling for life in-surance payouts to EGP 80,000. While a number of industry stakeholders claim the requirement is harmful for the industry, El-Zoheiry says it still falls short of regional and developed markets. “Post-float, the current minimum capital of EGP 60 million shrank to less than USD 5 million, which is very de-terrent to consumer confidence as well as compa-nies’ investment position,” he explains. “Overseas, insurance companies have a paid-in capital of up to USD 100 million.”

According to Moody’s, the proposed increases in capital requirements will give insurance companies a better credit profile and support “the absorption of both underwriting and investment risk.” Higher paid-in capital puts companies in a better financial position, especially in the insurance business, which largely relies on reinsurance. Higher capital require-ments will enable insurers to pay more claims out of their own pockets, retain more risk and become insurance companies rather than only brokers.




Non-life65%

Life35%

25%

17%

15%11%

9%

7%

5%3%

3%3%

2% 1%

HealthMotor Comprehensive

Fire

Accident

Oil

Engineering

Motor Compulsory

Funds

Aviation

Marine Cargo

Marine Hull

Inland Transport


Sources: FRA, Insurance Federation of Egypt

Non-Life GWP (EGP million)Health 4,459 5,735 Motor Comprehensive 3,225 3,783Fire 2,898 3,330 Accident 2,234 2,508 Oil 1,990 2,024 Engineering 1,446 1,617Motor Compulsory 1,076 1,056Funds 482 746 Aviation 504 682Marine Cargo 623 651Marine Hull 309 356Inland Transport 182 205 Non-Life Total 19,428 22,693

Life GWP (EGP million)Life Total 10,100 12,458 Total (EGP million) 29,528 35,151

FY 2017/18 FY 2018/19

Egypt Insurance Premiums: Composition and Growth Life General y-o-y growth

20060

5

10

15

20

25

30

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2007 2008 2009 2010 2011 2012 2013 20152014 2016 2017 2018

39%61%

42%

58%

44%

56%

39%

61%

41%

59%

41%

59%

42%

58%

43%

57%

45%

55%

47%

53%

48%

52%

44%

56%

44%

56%

EGP

mill

ion


MIC

MLIC

Allianz Life Insurance

MetLife Life Insurance

AXA Life InsuranceEgyptian Life Takaful CompanySuez Canal InsuranceMisr Emirates Takaful Life Insurance Company

21%

13%

10%

8%7%4%

3%3%

3%

28%

Allianz Egypt

Others



Insurance Industry Medium-term Goals

Insurance Companies’ Market Share by GWP Value (Jan-Aug 2019)

Total market = EGP 10.7 billion (USD 664 million)

Source: FRA

Source: FRA

Indicator 2017 2022

Contribution to non-oil GDP 0.8% 2%+

Gross written premiums EGP 25 billion (USD 1.4 billion)

EGP 50 billion (USD 3 billion)

Sector investments EGP 86 billion (USD 4.8 billion)

EGP 150 billion (USD 9.1 billion)

Aggregate size of insurance funds EGP 60 billion (USD 3.3 billion)

EGP 100 billion (USD 6.1 billion)

The government’s EGP 600 billion (USD 36.4 billion) Universal Healthcare Act (UHA) may also play a role in shaping the insurance business going forward. The majority of Egypt’s insurance companies operate in the healthcare segment, which generates about EGP 6 billion (USD 375 million) in revenues. The UHA, which launched in 2018 and began rolling out in July 2019 in Port Said, will give all Egyptians full access to state-run health insurance coverage by 2032, with premium contributions coming from em-ployers and employees. As per the law, the govern-ment will fully fund health expenses for the 30% of

the population who cannot afford the premiums. “Article 10 of the law states that the government can

use private insurers in the system,” clarifies El-Zoheiry. How this article will play out is still unclear, but there are a number of models that can be followed. For ex-ample, “private insurers can pay out any price differ-ential between the government and insurance companies’ price systems. So suppose a patient has a heart surgery for EGP 100,000 and the government’s price system allocates EGP 40,000 for that surgery. The insurance company can [cover] the remaining EGP 60,000.”

Also brewing is the government’s IPO program, which includes two insurance companies among the 23 companies slated for partial pri-vatization: MIHC and its subsidiary MLIC. The in-surance sector’s presence on the Egyptian stock market is negligible, with only two companies—Delta Insurance and Mohandes Co. Insurance—listed in the non-banking financial sector. In 2018, the financial services (excluding banks) sector was the second highest contributor (11%) to total market capitalization, after banks. Given the existing premium gaps and growing consumer awareness, there is extensive room for new players in the market, which bodes well for the bourse. “There are five new overseas en-trants in the pipeline that the regulator is cur-rently working with and doing its due diligence on,” El-Zoheiry discloses. “Quite a few more have expressed interest in entering Egypt’s in-surance market, which implies the sector pres-ents a big potential for overseas investment.”


A PR

O LI

KE Y

OU

WW

W.

FI

AT

.C

OM

.E

G

A RE

AL P

RO N

EVER

STO

PS B

EING

A P

RO.

06:00

AM09

:00

AM06

:00

PM09

:00

PM00

:00

AM

Aut

hori

zed

Dea

ler:

Dyn

amic

s D

istr

ibut

ion

S.A

.E (C

all C

ente

r :1

9984

) - C

airo

: 42

Abu

Bak

r El

Sed

diq

Str

eet,

Safi

r S

quar

e, H

elio

polis

(Te

l: 02

2779

9174

–

0227

7991

75) -

El O

bour

Cit

y: S

how

room

and

Ser

vice

Cen

ter:

Str

eet

100

(Tel

: 448

1493

4/36

/37)

- A

lexa

ndri

a S

ervi

ce C

ente

r: 2

7 K

M A

lex-

Cai

ro

dese

rt R

oad

(Tel

: 03-

3961

3137

– 0

1003

8811

24) -

Dam

iett

a C

ity S

ervi

ce C

ente

r: S

hata

Vill

age

besi

de E

l Om

da fu

el s

tatio

n, D

amie

tta-

Por

t sai

d R

oad.

(T

el: 0

1060

9791

11)

WIT

H FI

AT P

ROFE

SSIO

NAL,

CHOO

SE FR

OM TH

E DUC

ATO

& DO

BLO

WHA

T FI

TS YO

UR P

ROFE

SSIO

NAL N

EED

.... B

ECAU

SE W

E ARE

PRO

LIKE

YOU.

Egypt’s banking system has been the economy’s bread and butter since the early 2000s, accounting for nearly 90% of total assets in the country’s financial system as of Q1 2019. Buoyed by strong liquidity, high profitability and financially sound fundamentals, the sector is one of the most lucrative

across the MENA region. According to a July 2019 research note by Beltone Financial, Egyptian banks showed the fastest growth in the region since 2015, posting a compound annual growth rate (CAGR) of 26.3% in terms of deposits. The local investment bank credits the strong growth to rising money supply as retail deposits—its biggest constituent—continue to be banks’ primary funding source. As of August 2019, bank deposits stood at just over EGP 4 trillion (USD 240 billion), 80% of which were injected by households.

BANKS BREWING Business



Banks Brewing Business

“In terms of profitability and asset quality, we are one of the strongest—if not the strongest—banking systems in the region,” says Akef El Maghraby, vice chairman of state-owned Banque Misr, the country’s second largest bank in terms of assets after the National Bank of Egypt. “The CBE’s [Financial Sector Reform] Pro-gram, which began in the early 2000s, is still one of the main reasons behind the impeccable perform-ance. However, one of Egypt’s biggest advantages is a real diversified economy as opposed to other re-gional peers, who are largely reliant on oil for growth.”

The Central Bank of Egypt (CBE)’s regulatory over-sight has safeguarded the banking system against ex-ternal or internal shocks. As of June 2019, aggregate capital adequacy for the sector stood at a healthy 16.9%. Local lenders also have one of the region’s lowest and most improved asset quality: Egypt’s ratio of non-performing loans (NPLs) to total loans stood at 4.2% in June 2019, which has been steadily dropping from 7.1% in 2015 and 10.5% in 2011.

Despite an overall global economic slowdown, the CBE’s financial stability index rose to 0.54 in March 2019 from 0.51 since 2017’s end, due to solid im-provements in the country’s macroeconomic funda-mentals as well as the banking system’s high solvency

and continuous improvements in asset quality. The index was created in March 2011 as a composite quantitative measure using 21 variables in four sub-indices: banking sector performance, macroeconomic conditions, financial market development and the global economic climate. It uses quarterly data to measure financial stability on a scale of 0 to 1, with 1 indicating optimal financial stability.

In April 2019, global credit agency Moody’s up-graded Egypt’s overall sovereign credit rating to B2 with a stable outlook (from B3 with a positive outlook). The upgrade was followed the next month by improved credit ratings for Egypt’s five biggest banks (in terms of assets). According to Moody’s, the improved ratings stemmed from buoyant economic growth and the banking system’s improving operating conditions, in-cluding high exposure to government debt, solid bal-ance sheet growth, sufficient liquidity and sound capital levels. “We expect banks to maintain ample local cur-rency funding, high liquidity, and strong and stable prof-itability,” noted the global credit agency’s statement. As of FY 2018/19, the banking system recorded EGP 62.5 billion (USD 3.7 billion) in profits, more than EGP 5.5 tril-lion (USD 329 billion) in assets and EGP 1.9 trillion (USD 111.8 billion) in government debt holdings.

Banking Sector SWOT Analysis

Strengths Weaknesses

OpportunitiesThreats

• Abundant household savings • Large consumer market • Sound financial footing, high liquidity and solid earnings • High exposure to government debt • Developed digital infrastructure

• Low banked population • Private sector crowded out by government debt • Low household lending • Restrictive regulations limiting credit expansion • High interest rates • Miniscule mortgage market

• Consumer finance & MSME lending • Corporate credit • E-banking and mobile wallets • Islamic finance

• Tightened global financial conditions • Security and political risks • Fiscal slippage



Egypt Banking Performance Indicators

22.2%

31.3%

51.4%

14.2% 13.6%11.71% 12.12%15.75%

19.20% 17.50%

4.0% 4.6% 3.9% 3.0% 3.0%

Jun-15 Jun-16 Jun-17 Jun-18 Jun-19

Credit Growth (year-on-year)

Lending Rate (less than 1 year)Net Interest Margin

24.4

30.9

21.519.2 19.2

1.5 2.0 1.5 1.4 1.4


Return on Average Equity (%)Return on Average Assets (%)

LTD Ratio

84.079.6

72.6 74.9 72.6

32.5 32.9 32.1 31.9 33.424.2 20.8

15.9 14.2 16.6

40.947.0 46.0 46.2 46.5


Deposits (% of assets)Loans (% of assets)

Securities (% of assets)

99.0 99.1 98.3 98.0 97.8

79.871.5

63.6 61.6 61.5

7.1 6.0 4.9 4.1 4.2


Loan Provisions (% of total loans)

Loans to Private Sector (% of customer loans)NPLs (% of total loans)

0.8%1.2% 1.3% 1.4% 1.4% 1.6% 1.7% 1.8%

5.4%

Pakistan Lebanon Chile Malaysia Egypt Romania SouthAfrica

Turkey Argentina

1.5% 1.9%3.1% 3.7% 3.7% 4.1%

5.0%

8.0%

10.3%

Malaysia Chile Argentina Turkey SouthAfrica

Egypt Romania Pakistan Lebanon

47.8%

85.6%

88.1%

95.2%

101.2%

103.6%

109.3%

117.9%

130.8%

179.5%

Egypt

Argentina

Saudi Arabia

Morocco

Russia

Indonesia

Kuwait

Tunisia

Turkey

South Africa

n Profitability

n Return on Assets

n LTD Ratio

n Ratio of NPLs to Total Loans

n Liquidity n Asset Quality

Source: CBE




Moody’s Outlook on Egyptian Banks (April 2019)

Detailed OutlookOutlook Drivers

Operating environment Improving

↑ Increased public and private-sector investment, higher exports and a re-covery in tourism are driving economic growth acceleration. ↑ Banking penetration will deepen, supporting bank deposit and loan growth. ↓ High inflation and interest rates, security and political risks, and tightening global financial conditions.

Asset risk Stable

= Banks’ high exposure to government debt. = NPL levels to remain broadly stable. ↓ Large volumes of untested new SME loans, ongoing security risks and loose NPL classification criteria leave banks vulnerable to a future turn in the eco-nomic cycle.

Capital Improving

↑ Banks’ capital buffers to increase slightly, supported by robust internal cap-ital generation and higher capital requirements. ↓ Egyptian banks’ capital levels remain modest and lower than similarly rated global peers.

Profitability and efficiency Stable = Stable profitability as increased revenues from high balance sheet growth

will be offset by higher costs.

Funding and liq-uidity Stable

= Sound funding profiles underpinned by high inflows of stable, low-cost cus-tomer deposits. Their high liquidity buffers are a credit strength. ↓ Potential pressures on foreign-currency liquidity following foreign investment outflows and tightening global financial conditions.

Government support Improving ↑ Improved fiscal record (reflected in the positive outlook on Egypt’s sovereign

rating) will enhance the government’s capacity to support banks.

Positive (Current)

What could change the outlook to

Stable:

What could change the outlook to Negative:

• Accelerating GDP growth of 5.5% and 5.8% in 2019f and 2020f, respectively • Banks' high exposure to sovereign debt • Ample local currency funding, high liquidity, and strong and stable profitability

• Weaker economic growth • A halt in the reform agenda, increased funding pressures or higher political risk • Foreign currency liquidity crunch

• Severe funding pressures, renewed liquidity crunch or geopolitical instability • Reduction in banks' capital buffers and significant increase in NPLs

Overall Outlook

Source: Moody’s



Hang-upsWhile the upgrade set the seal of approval on banks’ performance, Moody’s rated the banking sector’s macro profile—which evaluates system-wide factors that predict banks’ propensity to fail—as ‘weak,’ up from ‘very weak’ prior to April’s upgrade. Its statement noted, “[Egyptian banks’] macro pro-file is underpinned by the country's high unemploy-ment and low income levels, as well as the challenging credit conditions. The latter relate[s] to gaps in the legal framework for secured lending, high borrower concentrations and the significant in-crease in higher-risk loans to small and medium en-terprises (SMEs).” The agency also points to concerns about foreign currency liquidity following foreign investment outflows amid weak global fi-nancial conditions.

While the banking system’s biggest credit strength is its stable and low-cost local deposit base, which makes up about 70% of the sector’s total assets, the sector has one of the lowest lend-ing utilizations in the region. In August 2019, total loans grew 11% year-on-year to EGP 1.8 trillion (USD 107.8 billion), posting a five-year CAGR of 22%. However, loans represent less than 40% of total banking assets and the loan-to-deposit (LTD) ratio has been declining since the early 2000s from more than 65% in 2003 to 46.5% as of June 2019. In February 2019, S&P Global Ratings forecasted nominal loan growth to reach 17% by year’s end, but said that figure was still inadequate when ad-justed for inflation given Egypt’s “economic devel-opment needs.”

This unchanneled excess liquidity is a result of not only the CBE’s long-running reform program to re-duce default risks and improve the sector’s capital adequacy, but also due to the more recent high in-terest rates, reliance on government treasury debt, and low retail lending (see chapter 3). Amid shaky economic and political conditions between 2011 and 2015, banks became the primary player in the sovereign securities market to maintain profitability and minimize operational and credit risks. The trend grew stronger after the EGP float, with high yields on Treasury bills also substantially growing the sec-tor’s net interest margin. In August 2019, total gov-ernment securities stood at EGP 1.9 trillion (USD 107.8 billion), representing over a third of banking

assets, and outstanding T-bill balances, now ac-counting for just over 50% of the government’s net domestic debt portfolio, grew 17% year-on-year to EGP 1.4 trillion (USD 83.8 billion).

Egypt’s high-interest rate environment—another boon for banks’ sovereign lending—has weighed heavily on private sector borrowers, which accord-ing to the CBE are the biggest contributors to credit growth. Soaring interest rates, driven by the CBE’s aggressive monetary tightening policy after the EGP’s float, pushed away even more private sector borrowers whose capital expenditure (capex) levels were already depressed by a foreign liquidity crunch and the depreciated EGP.

According to the Emirates NBD Purchasing Man-agers Index (PMI), which measures the health of overall operating conditions in the non-oil private sector economy, credit remains a main pressure point on businesses looking to finance capex. Ac-cording to its June 2019 reading, “easing price growth in recent months has offered some respite, [but] subsidy reforms and a renewed pause in the CBE’s [monetary] cutting cycle mean that conditions remain difficult for private firms.”




Tracking Key Interest Rates

Source: CBE

That said, the CBE’s monetary easing has accelerated in 2019. “So far 350 bps have been cut [in H2 2019] which is very good news for both the business and consumer lending markets: Lower rates mean corpo-rates’ cost of borrowing will decrease, improving their competitiveness as they’re able to expand business activities and finance their investments as projects’ re-quired [internal rate of return] decreases. This is espe-cially true for export-oriented businesses, which also become more competitive when capex is cheaper,” explains El Maghraby. “On the household level, lower interest rates induce households to increase spending rather than hoard savings in the banks. [Also,] lower interest rates will incentivize households to take out more loans to finance their purchases.”

November’s PMI reading showed no signs of improve-ment in non-oil private sector business activity, which re-mained in contractionary territory (below the 50.0 threshold) at 47.9, down from 49.2 the month before. “We definitely expect higher loan activity on the part of the private sector but [it] will take time for the cuts’ effects to materialize. It takes time for fiscal/monetary policy changes to be embedded in the economy and their multiplier effects to manifest,” El Maghraby says. “That

being said, we will see results by 2019’s end [and] in Q1 and Q2 of 2020 in much higher magnitudes as prospec-tive expansionary directions continue taking place.” Fol-lowing November’s rate cut, Cairo-based financial services firm Pharos predicted the CBE would cut inter-est rates by an additional 300 bps throughout 2020.

Looking ahead, a number of dynamics may work in banks’ favor. Banks’ loan utilization may change as the government’s fiscal gap narrows and lenders look to drive growth elsewhere. According to Beltone Finan-cial’s July research note, “Our in-house macroeco-nomic outlook shows an increase in fiscal deficit marginally lower than our expected total assets growth, mainly on the back of the government’s fiscal reform, which will result in lower government securi-ties constitution of total assets.”

Deflating price pressures also signal further rate cuts await. “Historically, interest rates in Egypt aver-aged 7-8% for deposits, 11-13% for credit and 12-16% for consumer loans,” says Ahmed Issa, CEO of con-sumer banking at Commercial International Bank. Cairo-based HC Securities & Investment sees capex-borrowing picking up when interest rates fall below their pre-float levels.

Jun-

15

Sep-

15

Dec

-15

Mar

-16

Jun-

16

Sep-

16

Dec

-16

Mar

-17

Jun-

17

Nov

-16

May

-17

Jul-1

7

Feb-

18

Feb-

19

Aug-

19

Nov

-19

Apr-1

8

Sep-

17

Dec

-17

Mar

-18

Jun-

18

Sep-

18

Dec

-18

Mar

-19

Jun-

19

Sep-

19

Overnight Lending Rate (%) Overnight Deposit Rate (%)

9.75

12.75

15.75

8.75

11.75

14.75

17.75

19.75

16.75

18.75

18.7517.75

17.7516.75

16.75

15.75

16.75

14.2513.2515.75

13.2512.25



Taxing turnovers

CBE unveils CONIA

In the works since 2017 is a new Banking Act, which Cabinet approved in October 2019. Among the law’s final draft proposals is a 1% annual tithe on bank prof-its to finance a bailout fund that would insure banks against bankruptcy, as well as a three-year grace pe-riod for local banks to increase their minimum paid-in capital to EGP 5 billion (USD 300 million) and USD 150 million for foreign banks. The new capital require-ment, a tenfold increase from the current EGP 500 mil-lion (USD 30 million), will likely take a toll on dividends, specifically for smaller banks. Beltone’s re-port did not see the proposed amendment dramati-cally shaking up the sector: “Despite their low capital bases, [banks] with above-average market profitability and strong parent support that values the Egyptian market’s profitability compared to other regions… [will be able] to meet the new requirements.”

In February 2019, Law 10 of 2019 amended parts of the Income Tax Law 91 of 2005 to specify a new tax treat-ment for banks’ treasury-derived income. Banks must now account for treasury profits in their taxable income, requiring them to reallocate costs to match revenues in their finances. Banks have complained that the realloca-tion process causes other operating costs to shrink, fur-ther amplifying income from non-treasury operations

and resulting in an effectively higher tax rate. According to local asset management and invest-

ment banking firm Shuaa Securities, the new tax treat-ment could slash banks’ annual earnings by up to 17% depending on their exposure to sovereign debt. To tilt the scale in their favor, banks can reduce their expo-sure to T-bills or demand higher yields in auctions. “Rising yields would help banks somewhat restore their earnings. According to our estimates, it would take an average of 335 bps rise in yields for banks to offset the resulting tax hike,” said the firm’s research note. Should yields remain the same or decline, Shuaa sees banks reallocating excess liquidity to higher-yielding interbank assets and loans.

El Maghraby believes the impact will be much smaller: “The effective tax rate is now higher, but the overall impact is far from major and has been comfort-ably absorbed into the system. Bank profits are still in-creasing and at a healthy rate following the rate’s imposition.” The Banque Misr executive points out that bank earnings, especially for the two biggest state-owned banks, were hit by the scrapping of 20%-yield certificates of deposits, and “still we witnessed an annual rise in overall profits.” According to the CBE, banks’ profits grew 30% year-on-year as of June 2019.

In August 2019, the CBE launched a risk-free benchmark interest rate to support the development of a broader set of products for the local money market. The Cairo Overnight Interbank Average (CONIA) is a fluctuating rate calculated daily as the weighted average rate of unsecured overnight EGP interbank trans-actions. Due to these transactions’ extremely short tenors, the benchmark rate is risk-free. The move falls in line with the global shift from interbank offered rates (IBORs) to risk-free rates (RFRs).

IBORs were vital in global financial markets by acting as reference rates for hundreds of trillions of dollars in derivative markets and trillions of dollars in bonds, loans, deposits and securities. However, as concerns grew about IBORs’ sustainability amid the significant decline in unsecured banking finance market activity over the past few years, the international finance community began calling for a transition to RFRs.

With CONIA in place, the CBE launched a mechanism allowing banks to set up overnight indexed swap (OIS) agreements. One of the fastest-growing instruments since they globally emerged in the 1990s, OIS contracts allow financial institutions to manage their interest rate risks by matching the maturity of their assets and liabilities, which helps protect both banks from fluctuations in the overnight rate (that varies significantly within periods as short as three months).

With an OIS, if Bank A is paying interest on a CONIA-based loan from Bank B, and Bank B has a separate loan with a fixed, short-term interest rate from Bank A, the two parties can exchange interest rate formulas. Both banks would make interest payments as usual, and at the end of the agreed-upon period, the bank that paid less interest makes up the difference to the other.


Egypt has come a long way since 2014 when the Central Bank of Egypt (CBE) embarked on numerous initiatives to bring the unbanked population online. And while the outlook on the banking system has never been more bullish, experts believe financial inclusion is one of the keys to unlock its full potential.

According to the latest data in the World Bank’s Global Findex, the number of adults with a bank account grew to 33% of Egypt’s population in 2017, up from 14% in 2014 and 10% in 2011; market research firm Euromonitor estimated it grew to 38% in 2018. However, that figure is still significantly lower than the global average of 69% and the low-middle income countries’ average of 57%. Egyptian households still steer clear of banks, despite having substantial investible cash on hand. “The extent of the Egyptian financial system’s [liquidity] was illustrated in September 2014, when the government raised EGP 64 billion [USD 4 billion] in Suez Canal development certificates in just over a week, with most of the funds coming from individuals paying in cash,” says a Q2 2019 Economist Intelligence Unit report.

CRACKINGConsumer Credit



According to surveys conducted in 2017 by the World Bank and U.S.-based research company Gallup, just over 6% of Egyptian households had a loan from a for-mal financial institution, while 38% borrowed from family and friends. Of those surveyed, only 25% had a debit card, 3% had a credit card and just 4% had a housing loan.

On the supply side, consumer banking is far from its full potential. As of July 2019, banks’ outstanding bal-ance of consumer loans stood at EGP 347.8 billion (USD 20.8 billion), posting a compound average growth rate (CAGR) of 15% since 2010. However, the retail segment’s share of total loans has been gradu-ally declining from 25% in 2014 to 20% as of August 2019, below its 22% share in 2010. Regionally, the consumer segment’s share of total loans in Egypt is lower than in the UAE (22%), Lebanon (31%) and Saudi Arabia (45%). These markets admittedly out-pace Egypt’s retail banking metrics on the back of substantially lower populations, but they also have more diversified retail loan portfolios.

“The majority of consumer credit in Egypt is concen-trated in the personal loan classes,” says Ahmed Issa, Commercial International Bank (CIB)’s CEO of con-sumer banking, while other more promising loan cat-egories remain unexploited. According to consumer loan data from Egypt’s 10 biggest banks in terms of assets, personal loans accounted on average for 67% of their retail loan portfolios in 2018, while overdrafts, credit cards and mortgages represented 15%, 9% and 8% of their collective consumer loans, respectively, with the exception of the Housing & Development Bank (where mortgages make up about 75% of its re-tail loan portfolio).

Scaling up mortgages “Mortgages account for 70-80% of U.S. bank loan portfolios, while the remaining share is channeled to personal and student loans as well as credit cards,” says Issa. The Mortgage Law 148 of 2001 grants li-censes for issuing long-term home loans to banks and specialized mortgage finance companies, the latter being regulated by the Financial Regulatory Authority (FRA). According to the FRA, as of August 2019, out-standing mortgages granted by mortgage companies totaled just over 60,400 contracts worth EGP 12.4 bil-lion (USD 706 million), generating a mortgage debt-to-GDP ratio of 0.3%. While the ratio has improved

considerably from 0.06% in 2004, it remains negligi-ble. Mortgages remain constrained by not only regu-latory hurdles but also industry-related ones, including high interest rates stemming from the CBE’s contractionary monetary policy implemented after the float of the Egyptian pound. As of 2018’s end, the av-erage interest rate on 13-year home loans stood at 13.14%, compared to 12.18% in 2014, and 12.05% in 2011. “High interest rates have definitely impacted loan growth, especially mortgages since they have yet to take off,” explains Issa. “However, we are definitely predicting this issue will dissolve as monetary policy continues easing in the near future.”

Affordability is also an issue. According to the FRA, the average monthly mortgage installment for bor-rowers was EGP 9,942 (USD 585) as of 2018’s end. Ac-cording to July 2019 data from state statistics agency CAPMAS, the average annual household income is EGP 58,900 (USD 3,465)—which means average mort-gage payments are double average monthly incomes.

In hopes of kicking off market activity, the CBE in 2014 launched a EGP 10 billion (USD 560 million) mortgage fund that offered subsidized interest rates of 5-7% and 8% to low-and middle-income borrowers, respectively; the fund was extended by another EGP 20 billion (USD 1.1 billion) in June 2019. The initiative successfully boosted the market: As of July 2019, low and middle-in-come mortgages had grown 60% in volume to 213,000 contracts and 138% in value to EGP 20.6 billion (USD 1.2 billion) since 2014. With ample room remaining, the CBE announced it would introduce a new EGP 50 billion (USD 2.8 billion) fund in June 2019 to provide interest rates of 10% to middle-income earners. The government aims to grow mortgage companies’ assets 150% to EGP 20 bil-lion (USD 1.3 billion) by 2022.



Cracking Consumer Credit

Digital banking is another area for banks to grow con-sumer credit, expand the formal economy and eliminate cash transactions (which still account for more than 90% of transactions in Egypt). The country has one of the high-est mobile penetration rates, a youthful population as well as low banking density (defined as the number of bank branches per 100,000 inhabitants)—all catalysts to spur digital banking growth. As of Q1 2019, Egypt’s banking density was 23.5, with the majority of bank branches concentrated in urban areas, indicating great potential should banks increase customers’ access to their services digitally. Banks’ digital infrastructure is also sparse: there were 12,656 ATMs and 79,952 point of sale (POS) terminals serving more than 25 million debit cards and 4 million credit cards as of June 2019, showing pen-etration rates of 13% (for ATMs) and 81.5% (for POS). De-mand for digital banking infrastructure promises to grow

as the state-backed debit card Meeza hits the market. Meeza started rolling out in December 2018 to eliminate all cash transactions exceeding EGP 500 (including pay-roll) by government entities. As of July 2019, more than 270,000 Meeza cards had been issued out of 20 million cards planned by 2021’s end.

The prospects are bright for e-banking as the CBE pushes ahead with its financial inclusion efforts and banks follow its lead. In June 2019, Mastercard fore-casted Egypt’s e-banking industry would double in size in terms of transactions by 2022, with electronic transactions accounting for 10% of all transactions, up from 2-3% currently. In 2019, more banks began tak-ing their banking activities online, including Banque du Caire, Attijariwafa Bank and Banque Misr. As of No-vember 2019, 31 out of 38 banks offered digital serv-ices, and 15 of these also provided mobile banking.

Going digital

Mortgage Finance Companies KPIs (2018)n Mortgage Indicators

n Year-end Metrics n Mortgage Market Value Growth (EGP billion)

Outstanding Mortgages Balance (EGP billion)

Loan-to-Value (LTV) Ratio

Average Financing Period (years)

2017 3.6 55.0% 15.2 2018 4.6 53.6% 13.2 Change 27.8% ↑ 2.5% ↓ 1.3% ↓

Source: CBE

14

EGP 8billion

46%

1.4%

0.2%

Mortgage financecompanies

(USD 450 million)Total assets

Year-on-year growth in assets

Assets’ share of total non-banking financial

services assets

Assets’ share of GDP

7.2

10.4

14.5

19.8 20.6

July December July December July

2017 2018 2019



Egypt’s Credit Indicators

2013 2014 2015 2016 2017 2018 CAGR

Total Loans (EGP bn) 546.2 625.0 786.7 1,293.4 1,453.1 1,802.0 20.9%

Private sector 287.5 352.5 408.3 629.2 664.3 753.3 27.0%

Government 41.6 47.4 100.7 296.6 373.8 570.5 21.2%

Consumers/households 132.4 156.6 192.4 228.3 253.7 305.0 68.9%

Public sector 75.2 58.2 76.7 126.6 154.4 165.9 18.2%

Other 9.5 10.3 8.6 12.7 6.8 7.3 -5.1%

Total number of bank branches 3,651 3,712 3,824 3,950 4,093 4,220 2.9%

Total number of ATMs 6,283 7,855 8,443 10,701 11,002 12,200 14.2%

n Aggregate Indicators

n Banking Assets Breakdown

n Consumer Credit Indicators (as of August 2019)

356.1 Outstanding Retail Loans (EGP bn)

6% Share of Total Assets

20% Share of Total Loans

9% Share of Domestic Credit

4,298 Total Number of Branches

12,656 Total Number of ATMs

2% 2% 4% 7% 8% 11% 9%8% 8% 8%6% 5%

6% 6%

17% 18% 16% 16% 14%14% 14%

44%46% 44% 40%

35%35% 34%

2013 2014 2015 2016 2017 2018 2019* *as of August 2019

Securities & investments in T-bills

Private sector credit

Consumer credit

Government credit




n Consumer Loan Concentration in Select Banks (2018)

n Egypt ATM Supply (2018)

Total assets

(EGP bn)

Retail loan portfolio (EGP bn)

MSME portfolio (EGP bn)

Number of ATMs

Number of branches

National Bank of Egypt 1,920.0 58.4 44.0 4,068 461 Banque Misr 884.0 27.0 10.9 2,292 620Commercial International Bank (CIB) Egypt 342.2 23.2 2.5 917 203 Qatar National Bank (QNB) Al Ahli 253.4 21.7 29.6 460 220 Arab African International Bank (AAIB) Egypt* 11.5 267.1 undisclosed 417 93 Banque Du Caire 165.7 26.1 7.3 698 219 Faisal Islamic Bank of Egypt 93.8 1.2 undisclosed 350 36 AlexBank 93.1 18.1 3.9 undisclosed 211 Credit Agricole Egypt 53.5 21.5 1.7 131 79 Abu Dhabi Islamic Bank (ADIB) of Egypt 49.2 11.1 undisclosed 780 70 Aggregates of Top 10 Banks 5,432.7 218.8 -- 10,113 2,212Share of Total Banking System 75% 72% -- 83% 52%

n Retail Metrics for Select Banks (as of Dec. 31, 2018)

33%

19%8%6%

6%4%3%3%1%

17%NBEBanque MisrCIBADIB

Banque Du Caire

QNB Al AhliAAIBFaisal Islamic BankCredit AgricoleOthers

17.4%

78.7%95.7% 89.3%

80.3% 73.9%

27.1%

59.3% 70.6% 77.6%

4.6%

0.1% 6.5%11.0%

3.8%

0.1%

40.7%11.3%

6.3%

41.2%

3.6%3.5% 7.0%

7.1%

48.4%

10.4% 12.5%

2.0%

21.3%0.6%

0.8% 1.6%

15.2%

4.3%

7.7% 3.6%

34.8%20.1%

AAIB ADIB+ AlexBank BanqueDu Caire

BanqueMisr

CIB CreditAgricole

Faisal IslamicBank+

NBE QNB Al Ahli

OtherCredit cardsOverdraftsMortgage loansPersonal loans

+Islamic banking loans

Sources: CBE, bank financial reports

*Assets in USD billion, retail loans in USD million



Micro, small and medium enterprises account for 90% of all enterprises and 75% of the workforce in Egypt. “It is therefore vital for this part of corporate Egypt to receive enough access to finance,” CIB’s Issa says. One of the biggest impediments to MSME growth worldwide is financial support. Egypt is no exception: According to a May 2019 study by Acumen Consulting, only 12.4% of Egypt’s small busi-nesses use banks. They instead rely on personal funds, and contributions from family and friends to finance their busi-nesses.

The CBE launched an MSME initiative in 2014 to boost lend-ing to small ventures and broaden their exposure to for-mal finance. In 2015, it opened a EGP 200 billion (USD 11 bil-lion) fund to disburse loans to up to 350,000 firms; in 2016, it mandated that banks allocate 20% of their loan portfolios to MSMEs and announced below-market interest rates to lure more of these small ventures into the banking system. In May 2019, the reg-ulator agreed to count investments in MSME-focused eq-uity funds as part of the MSME loan portfolio mandate, giving commercial lenders more incentive to back angel investors, venture capitalists and private equity growth funding for MSMEs. Between December 2015 and June 2019, a total of EGP 144.2 billion (USD 8.5 billion) was

disbursed to 566,000 MSMEs under the initiative. Also in the works is an MSME law, aimed to lure

more of these ventures into the formal economy. Still in draft form, the bill proposes preferential tax treat-

ment for micro and small en-terprises that will see them pay a fixed amount over a three-year term regardless of revenue growth, subject to reassessment at the end of the term. Other tax-related incentives include five-year exemptions from the stamp tax, capital gains and con-tract and company establish-ment fees, starting from the date of their ventures’ estab-lishment.

While the CBE is pushing banks to increase MSME lend-ing, banks remain bound by a host of other Central Bank reg-ulations governing asset quality and capital adequacy levels.

Regardless of size, corporates requesting loans must present certified financial statements, tax returns, stamped sales invoices, property contracts and other documentation, which MSMEs (mostly operating in the gray economy) often cannot provide. Unable to relax these stringent procedures due to capital adequacy re-quirements, the government has mulled non-banking fi-nancial services for MSMEs, including microfinance institutions, factoring and leasing companies.

Securing smaller players

Medium enterprisesSmall enterprisesMicro enterprises

47.3%

46.6%

6.1%

Bank MSME Loan Breakdown by Value (2018)

Total = EGP 1.8 billion

MSME Act Proposed Tax RatesCompany Size

(in annual turnover) CBE Classification Current Tax Proposed Tax Tax Break

≤ EGP 250,000Micro enterprise

EGP 2,000 EGP 1,000 50%EGP 250,001-500,000 EGP 5,000 EGP 2,500 50%

EGP 501,000- ≤ 1 million EGP 10,000 EGP 6,000 40%EGP 1- ≤ 5 million

Small enterpriseEGP 50,000 -

EGP 5-10 million EGP 100,000 -Source: Enterprise Press

Source: CBE


Post-Office42.9%

Insurance19.8%

Privateinsurance

funds13.7%

Investmentfunds 8.3%

Financialleasing

Microfinance2.3%

Securities brokerage1.7%

Mortgagefinance1.4%

Factoring1.2%

Other1.4%

8.4

30.7

6.413.3

41.3

6.8

58.3%

34.5%

6.2%

Microfinance Financial leasing Factoring2017 2018 Growth

7.3%

FinancialLeasing

EGP 41.7 billion

Aggregate value of contracts

45.8%Annual growth

Micro-finance

EGP 11.5 billion

Aggregate lendingportfolio

62.2%Annual growth

Factoring

EGP 10.6 billion

Aggregate value of contracts

18.3%Annual growth



Source: CBE

As of 2018’s end

Non-banking Finance KPIs (2018)

Number of com-panies

Assets (EGP billion)

Share of non-banking assets Share of GDP

Microfinance (including NGOs) 924 13.3 2.3% 0.3%Financial leasing 228 41.3 7.3% 0.9%Factoring 9 6.8 1.2% 0.2%Total 1,161 61.4 10.8% 1.4%

Indicator 2018 Target (2022)

Microfinance portfolio size (EGP billion) 11.5 25.0 Microfinance beneficiaries (million) 2.2 4.0 Factoring portfolio size (EGP billion) 9.0 20.0 Financial leasing portfolio size (EGP billion) 24.0 60.0

n Sector Overview

n Assets Breakdown

n Portfolio Sizes

n Asset Growth (EGP billion)

n FRA Sector Targets



34%Male

66%Female

46%Company

54%Individual

65%Retail

14%Services

14%Agriculture

7%Industry

9.0%13.0%

45.0%

69.0%

37.0% 39.0%

20.0%14.0%

2017 2018 2017 2018Return on assets Return on equity

Microfinance Companies NGOs

Microfinance Breakdown, Jan-Aug 2019 (volume = 2.9 million loans)

Type of beneficiary Purpose of loan

Microfinance Profitability Indicators

Microlending programs have existed in Egypt since the 1960s but only gained substantial momentum in recent years when the Microfinance Law 141 of 2014 was rati-fied to regulate non-banking finance activities including microfinance, factoring and leasing, and open the doors for non-bank companies to offer these services. As of Au-gust 2019, a total of 3 million microloans worth a total EGP 14.4 billion (USD 850 million) were disbursed to small and micro firms, growing 14% and 42% year-on-year, respectively.

Of the 947 microfinance institutions (MFIs) in Egypt, the majority are non-governmental organizations (NGOs) with an aggregate portfolio of EGP 7 billion (USD 421.8 million) doled out to 1.9 million beneficiaries as of August 2019. The FRA categorizes microfinance NGOs into Tier A (with lending portfolios exceeding EGP 50 million), B (portfolios between EGP 10-50 million), and C (portfolios below EGP 10 million). The role of banks in microfinance has been largely limited to providing tranches of funding to MFIs, due to regulations banning MFIs from accept-ing funds because of national security concerns; the

exceptions are state-owned NBE, Banque du Caire and Banque Misr, which operate their own microfinance arms.

Since the Microfinance Law was enacted, a number of non-banking microfinance companies have entered the market, accounting for a growing market share. As of Au-gust 2019, the FRA’s nine registered microfinance com-panies accounted for 35% of the number of loans but 50% of their aggregate value.

These include Tamweely Microfinance, a EGP 50 mil-lion (USD 2.8 million) venture by state-owned investment bank NI Capital (a privately managed and incorporated subsidiary of National Investment Bank). Raya Holding’s Aman for Microfinance, which launched in 2018, has more than 15,000 active clients and doubled its paid-in capital to EGP 100 million (USD 11.2 million) in early 2019. Tasaheel is another giant in the industry, launched in 2015 by Ghabbour Automotive’s finance arm—GB Capital—with 500,000 active accounts. In September 2019, El Sewedy Capital announced it was looking to tap into the microfinance and leasing markets through its non-banking financial services license.

Source: FRA

Source: CBE

Gender


On its road to bringing the unbanked population on board, Egypt has developed one of the biggest and fastest-growing financial technology markets in the Middle East and North Africa (MENA), hosting nearly 20% of the region’s fintech companies as of 2018’s end. This makes the

country the second largest hub after the United Arab Emirates (UAE) and puts it ahead of Jordan, Lebanon and Morocco. Egypt’s burgeoning fintech scene is a product of the country’s large economy, mature banking infrastructure and wealth of human capital. With its strategic location—centered amid the five time zones covering Europe and the Middle East—and favorable labor costs, Egypt has earned a solid reputation in information and communication technology (ICT)-related services such as software development, data storage, outsourcing, offshoring and technological entrepreneurship.

FINTECH IS Flourishing



In 2018, Egypt’s ICT sector generated about 1.8 million jobs, accounting for 6.5% of the workforce, and con-tributed 2.5% to GDP. The country is also one of Africa’s top five internet markets and the MENA re-gion’s largest with a 95% mobile penetration rate, making Egypt one of the most promising markets for fintech to flourish.

Egypt is home to more than 45 fintech players—in-cluding 16 startups, nine financial institutions and nu-merous incubators, investors and microfinance institutions—operating in fields such as consumer fi-nance, savings, payment solutions, mobile cash, mo-bile wallets, crowdfunding, capital raising, e-commerce, telecom and cryptocurrency. There are about 9 million digital wallet holders, with 200,000-300,000 additional users opening accounts every month.

Among Egypt’s earliest and biggest adopters of fin-tech was Fawry, which set up shop in 2007 as the

country’s first payment solution provider. Today the platform processes 2.1 million transactions every day, with a customer base of 20 million Egyptians. Fawry is an intermediary payment channel connecting un-banked consumers who need to pay bills for online purchases, utilities and other services with participat-ing government entities and other businesses.

The fintech industry has since absorbed a wide array of financial services into its realm. For example, local investment bank EFG Hermes teamed up with other banks in 2017 to launch valU, a fintech app that now provides instant financing for big-ticket purchases to more than 100,000 customers. ValU allows customers to pay in installments over three to 24 months based on a credit score calculated using an in-app algorithm. Other investment banks have followed in EFG Her-mes’ footsteps: In 2019, CI Capital and Prime Holding each obtained regulatory approvals to operate their own consumer finance arms.

Note: This segmentation is an overview of the key players and is not a comprehensive list of all market participants. Source: INVYO

Fintech has indeed disrupted how banks deliver serv-ices to their customers and created many bank-beat-ing solutions for banked and unbanked consumers. More importantly, fintech has taken the world by storm by strengthening access to business finance,

specifically for small and medium enterprises (SMEs) in need of quick funds to jumpstart their businesses. In Egypt, the relationship flows both ways: many of the country’s emerging SMEs have set up shop in the fintech space.

Fintech for—and by—SMEs

Mapping Egypt’s Fintech Ecosystem



Fintech is Flourishing

According to UAE-based entrepreneurship platform Wamda, Egypt is MENA’s fastest-growing entrepre-neurship hub. The number of venture capital (VC) firms, accelerators and incubators has spiraled over the past few years, as has the number of SMEs seeking their funding and support. In 2018, MENA VC hit record levels with 366 investments worth USD 893 million in funding, up nearly a third over 2017. While UAE topped the charts with 30% of the region’s total deals, Egypt was the fastest growing, securing 22% of the deals compared to only 7% in 2017.

Driving the boom has been both opportunity and ne-cessity, with increasing awareness of entrepreneurship

leading a shift in mindsets. According to the 2018-2019 Global Entrepreneurship Monitor (GEM) report, more than 75% of surveyed Egyptians looked to en-trepreneurship as a career choice (compared to the global average of 43%), while 43.5% (double the global average) were already pursuing their business ideas. In terms of necessity, high overall unemploy-ment rates between 2011 and 2018, which included substantial numbers of jobless university graduates, made fintech one of the go-to sectors for entrepre-neurs. In September 2019, three Egyptian fintech startups landed a spot in the Forbes Middle East Fintech 20 list.

Egyptian Fintech Startups on the Forbes Middle East Fintech 20 list (2019)

RankCompany

NameField Funding

Year of Establishment

15 Vapulus E-payment gateways USD 1.1 million 2016

17 MoneyFellows Crowdfunding; rotating savings and credit association (ROSCA) USD 980,000 2016

20 Paymob E-payment gateways undisclosed 2015Source: Forbes

Far from flawlessFinancial technology has come a long way in Egypt, but it has yet to fully take off. According to GEM, 17% of busi-nesses surveyed in Egypt closed down in 2018, com-pared to 10.2% in 2017 and only 2.7% in 2010 – the second highest and most accelerating rate among 49 countries surveyed. It is true that country-specific eco-nomic and political variables during the period played a part, but there are also a number of structural challenges curbing the industry’s growth. Wamda cites high transac-tion fees on e-payments imposed by banks and payment gateways, limits on digital and mobile transactions, an embryonic regulatory environment and network prob-lems. Unlike in global markets, the cost of cash transac-tions is much cheaper than digital ones in Egypt, giving merchants and customers little incentive to turn to fin-tech. Egypt also suffers from one of the slowest internet speeds in the region and worldwide. According to the

October 2019 Speedtest Global Index, the average mo-bile and broadband download speeds in Egypt were only 16.54 and 14.34 megabits per second (Mbps), re-spectively, compared to the global average of 30.02 Mbps (mobile) and 70.68 Mbps (broadband). Egypt was ranked 107 out of 141 countries in terms of mobile inter-net speed and 131 out of 176 countries in terms of broadband speed.



Another issue is a dearth of funding, despite Egypt being MENA’s second most active fintech startup hub. According to the MENA Fintech Venture Report 2019 by regional startup platform MAGNiTT, Egyptian start-ups accounted for 7% of total funding (in value terms) allocated to MENA fintech ventures, trailing behind

Bahrain and Lebanon with 9% each. Egypt’s share of the region’s disclosed fintech startup funding agree-ments concluded during the first nine months of 2019 grew to 27%, at 13 agreements, from only 13% in the entire 2018. MAGNiTT’s annual report tracks fintech ventures’ funding deals across 12 markets.

GEM Entrepreneurial Framework Conditions: Egypt’s Ratings (2018-19)

Fintech Funding in MENA

Entrepreneurial finance 4.39 30Government policies: support and relevance 4.26 28Government policies: taxes and bureaucracy 3.5 35Government entrepreneurship programs 3.98 36Entrepreneurial education at school stage 2.33 47Entrepreneurial education at post–school stage 3.72 51R&D transfer 3.46 34Commercial and legal infrastructure 4.48 37Internal market dynamics 5.13 25Internal market burdens or entry regulation 4.38 24Physical infrastructure 6.52 26Cultural and social norms 4.56 37

Notes: 9 is best. Only 49 countries were surveyed but 54 were scored. Source: GEM 2018-2019

Score (1-9) Rank (/54)*

n Breakdown of Fintech Deals by Volume

MoroccoTunisia

2%

AlgeriaLibya

Yemen

Egypt

17%

Palestine

Lebanon

Kuwait

Bahrain

UAE

Syria

IraqJordan

SaudiArabia

Qatar

Oman

3%

<1%<1%

<1%

<1%

1%

1%5%

46%6%

7%1%

9%

1%

3%

56%

UAE Egypt Lebanon OthersTotal # of deals:

88Total # of deals:

30Total # of deals:

16Total # of deals:

48

2015 2016 2017 2018 2019 (Jan-Sept)

36%

59%

46%47%

11%

21%

13%

27%

5% 6%

21%

4%6%

20%

10%

27%22%

37%26%

n Share of Total Fintech Startups by Country (2018)

Source: MAGNiTT



Fintech is Flourishing

Financing fintech

CBE Fintech Innovation Fund Network

Source: CBE

In its plan to kickstart the industry’s growth and make Egypt a regional fintech hub, the Central Bank of Egypt (CBE) rolled out a three-year, multilayered strat-egy in March 2019, which includes a USD 60 million fund to back fintech startups. The fund will directly and indirectly funnel investments into fintech ventures through VC funds, startup incubators, accelerators and other industry-specific investors. The “innovation fund” should go live in early 2020 and will grow to USD 500 million within five years.

The CBE’s strategy also includes setting up FinTech Egypt, an in-house fintech platform and digital research lab that will connect all ecosystem players including startups, investors, financial institutions, policymakers, mentors and service providers. Through the platform, startups will have access to a cohort-based “regulatory sandbox” to test innovative solutions live in a relaxed regulatory environment. The structured, supervised na-ture of the sandbox will help identify and manage risks associated with new technologies before products hit

the mass market, in turn helping the CBE develop reg-ulations and consumer safeguards in line with global best practices. The initiative’s main purpose is to pave the road for the nascent industry’s growth and open the door for new business models that may be held up by stringent existing regulations.

International institutions are also allocating funds. In April 2019, Egypt secured USD 200 million from the World Bank to support SMEs and entrepreneurship. The same month, Startupbootcamp and the Interna-tional Finance Corporation launched a program to sup-port fintech startups in Egypt in collaboration with local investment bank Pharos Holding’s Pride Capital, the American University in Cairo’s AUC Venture Lab, AlexBank and the Export Development Bank of Egypt. The four-year program will help two private sector fin-tech-focused accelerators improve their services to 40 startups in areas such as mentorship, business devel-opment and technical training, to help the fledgling ventures attract funding from investors.

Co-investments with VC funds,

incubators/accelerators

at startup level

CBE FUNDSOF FUNDS

Investors

Regional tech/fintech funds

Incubators/accelerators

Startups

VC (tech/fintech) funds

$ $$


Sponsors

Sponsors

DownloadAmCham Egypt

Application

◗ Receive notifications about upcoming events, register and pay online*◗ Watch speeches given by ministers and business leaders at AmCham events◗ Access the full Members database ◗ Request other members’ contact information *◗ Access exclusive offers *◗ Check Members’ latest news

“For members, please login using your business email provided to AmCham”

* this feature is for members only

The App allows you to

Your Gateway to

CommunityAmCham Egypt

Mobile app 2.indd 1 1:18 19/20/10 PM

Equity investors ended 2018 with heightened anxiety due to looming recession fears and a global emerging market (EM) sell-off. Signs of economic softness persisted in 2019, with the battle be-tween the world’s two largest economies driving bearish sentiments. Trade tensions between the

United States and China began fraying in Q1 2018, when new U.S. tariffs on USD 200 billion of Chinese goods prompted retaliatory tariffs on USD 60 billion of U.S. goods. The two countries paused planned tariffs in the beginning of 2019 and rekindled trade talks in June, by which time global equity outflows had surpassed USD 116 billion. Little progress was made, however, and hopes for a settlement dimmed in August 2019, when U.S. President Donald Trump announced another tariff increase. In response, the yuan depreciated sharply below the key 7 per USD level for the first time in 11 years, sending U.S. and global equities into a state of sorrow. U.S. equities lost USD 700 billion during the first few weeks of August and European markets followed.

CAPITAL Crunch


Jan-Oct (2019) Growth


Capital Crunch

EMs also sent out distress signals, recording their biggest daily losses as more investors fled their fixed-income assets. Some USD 6.8 billion in funds were pulled out of EM equities and bonds during the first week of August, with Asian and Latin markets hit hard-est due to their close trade ties with Beijing. While less exposed, MENA stocks began dipping in late August—including Saudi Arabia, the United Arab Emirates (UAE), Kuwait and Oman—amid fears the trade spat will depress the oil demand and growth in general.

The Egyptian Exchange (EGX) has cushioned itself pretty well from the global storm, still buoyed by an at-tractive currency, positive macroeconomic fundamen-tals and stronger investor confidence. In May 2019, the British investment management fund Franklin Temple-ton ranked Egypt’s bourse among its top three global market picks for growth. Citing Egypt’s economic re-form program and improved foreign profit repatria-tion, Salah Shamma, Franklin Templeton’s head of investment-MENA equity, told local media he believed Egyptian equities will become even more attractive as prices continue deflating and monetary policy eases. Inflation stood at 3.6% in November 2019, after shrink-ing to a 14-year low of 3.1% in October, and key inter-est rates were cut by a total of 450 basis points (bps) throughout the year.

Egypt was second on Bloomberg’s June 2019 rank-ings of EM equities highly resilient to the instability prompted by the trade war, behind India and ahead of the Philippines. The study evaluated 21 EMs based on factors such as domestic demand and exposure to China or the U.S. Bloomberg found that EM sell-offs have left Egyptian equities relatively undervalued and shielded them from the effect of the trade war’s

shocks. EGX equities are the sixth cheapest among global

markets and third in the Arab world behind Oman and Dubai, according to a June 2019 report by local in-vestment bank Shuaa Securities. The EGX also leads MENA in terms of earnings growth: Egyptian stocks have the region’s highest return on equity at 31%, with a forecasted compound annual growth rate (CAGR) of 24% between 2018 and 2021. “The EGX trades at a forward [price-to-earnings] P/E ratio of 8x, which is quite attractive versus the [EM] peer average of 12x,” says Allen Sandeep, director of research at Naeem Holding.

“The EGX has been one of the best-performing stock markets over the past couple of years across all emerging markets. Obviously, the market goes up and down hand in hand with investor sentiments, which have definitely been tested this year due to global conditions,” adds Sherif El Kholy, partner and head of MENA at the Cairo office of the EM private eq-uity giant Actis. “It comes as no surprise when you find Egyptian stocks being affected by these conditions,” he says, especially when foreigners represent over 30% of market activity by volume.

Weathering the storm

Trading volume (billion securities) 51.8 43.5 -16%

Trading value EGP 306 billion (USD 17 billion)

EGP 336.6 (USD 19.8 billion) 10%

EGX 30 index value (EGP terms) - 14,558.02 10%EGX 30 index value (USD terms) - 3,063.02 22%

Source: EGX

Jan-Oct (2018)

EGX Metrics



The EGX had its share of setbacks in 2019 on the back of local hiccups. “The prolonged dispute with Global Telecom Holding (GTH) has impacted sen-timent and trust among investors and caused trad-ing volumes to fall,” Sherif Shebl, vice president of GCC sales at local investment bank Pharos Hold-ing, told local media in July. In 2018, the Egyptian Tax Authority seized EGP 990 million (USD 55 mil-lion) from GTH’s local funds over a tax dispute dat-ing back to 2016. The parties reached a USD 136 million settlement in June 2019. Other domestic contributors included a slowdown in the real estate sector (whose shares fell 8.2% in Q2 2019), a grim corporate earnings season and contractionary monetary policy.

Ongoing delays of the government’s initial public offering (IPO) program, on the table since 2016, has also contributed to softer sentiments. After the gov-ernment kickstarted its partial privatization efforts in Q1 2019 with a 4.5% secondary offering of consumer goods company Eastern Tobacco, the program was paused to wait out the EM equity exodus.

The market partially rebounded in Q3 with a big boost from the August IPO of Fawry for Banking & Payment Technology Services, a non-banking finan-cial technology and e-payments provider that en-tered the market in 2007. The IPO was the largest since 2015 when UAE-based real estate developer Emaar Misr took its company public on the local bourse. Fawry’s IPO received healthy demand, laying the grounds for reviving Egypt’s anemic IPO market, which hadn’t seen action since Sarwa Capital went public in October 2018. “The subscriptions for both the public and private offerings for Fawry were large and strong because the industry itself is new to the market and has greater-than-average growth,” Radwa El Swaify, head of research at Pharos Holding, told Reuters in August. “The view of investors this time around is towards the long-term payoff and not the short-term.” The IPO has also set the tone for Egypt’s stock market ahead of other planned offerings, in-cluding those lined up for the state’s partial privatiza-tion program.

The market is expected to get a boost from the 350 bps drop in interest rates rolled out in the last five months of 2019. “Lower interest rates indicate the EGX will become more competitive as investors pull their funds out from banking instruments and into higher yielding assets,” explains El Kholy.

Unexpected turn At the end of August, analysts had predicted the benchmark EGX 30 index would break the 15,300 mark by September’s end due to anticipated rate cuts. Instead, the bourse turned in its worst showing since 2016 in the last week of September as in-vestors dumped shares following two nights of protests in Egyptian cities, with foreigners leading the sell-off. The benchmark finished the week down 6%, nearly wiping out its gains during 2019. The bond market also felt the impact, with Citibank esti-mating USD 800 million in Egyptian government debt outflows over that week. According to Bloomberg, the EGX has since been one of the world’s worst performers as its returns on equities dwindled compared to other EMs.

“The EGX’s performance over the last quarter has been range-bound,” says Sandeep. “While inflation drops and consecutive interest rate cuts were posi-tives for the economy, foreign [inflows] into the EGX as well as local debt have slowed down due to disap-pointing corporate earnings results, heightened geopolitical risks (at the time), [and] news of protests, which in my opinion was blown out of proportion by the foreign media.”

“We didn’t reap the full benefits of interest rate cuts on the EGX because you can’t isolate them,” El Kholy adds. “The cuts took place during a period when other influencing factors were taking place as well.”

Between July and October 2019, foreign participa-tion dropped by 5%. Since the start of 2019, foreign investors were net sellers of EGP 2 billion (USD 120 million) in Egyptian equities; during the same period of 2018, foreign investors were net buyers with an eq-uity of EGP 5.9 billion (USD 330 million) in EGX stocks.

“The rebalancing of portfolios—i.e. indirect impacts of the Aramco IPO—have also somewhat impacted the bourse’s performance in Q3 [2019],” notes Sandeep, meaning investors were realigning their portfolios’ asset weights. The Saudi state-owned oil giant an-nounced it would go public by year’s end in a trans-action that analysts at U.S. investment bank Morgan Stanley valuated between USD 1.06-2 trillion, crown-ing it as the world’s biggest IPO. Even still, Sandeep says, “For now, we see the impacts [of the Aramco IPO] as minimal on the EGX as Arabs account for about 8% of market volumes.”



Capital Crunch

*Fawry offered 21.2% of its shares to strategic investors: state-owned banks Banque Misr and National Bank of Egypt (7% each) and Actis (7.2%).

Source: EGX

Investors’ nationalities in public & private placements

2.7

19

4.3

89

28.4

2,218Investors

Egyptians Arabs Foreigners

Shares (million)2,326

Public placement

Investors

90

35

18.2

29

111.2

87Investors

Shares (million) 151

Private placement

Investors

Investors participating in private & public offering by

nationality54.8%

8.8%

36.4%

Arabs

ForeignersEgyptians

78.84%21.16%

11% 89%

Investors participating inpublic & private placements

Bought

New Investors

Existing Investors

TotalIPO

35.4 million Shares

219.3 million Shares

Value EGP 228.5 mn

Value EGP 1.4 bn

Public placement subscription

3010%

5%

21%*

Public placement

Private placement

Times

Private placement subscription

16 Times

10% 21%

5%

*

Fawry IPO Facts



Going forward, the EGX should continue deepening and expanding, particularly as the state’s IPO program mate-rializes. Baker & McKenzie sees the EGX being home to IPOs worth USD 93.9 million in 2020, USD 170.9 million in 2021 and USD 213.5 million in 2022. According to Min-ister of Public Enterprises Sector Hesham Tawfik, the state should resume selling stakes in public sector companies in Q1 2020, with a number of options to be first in line, in-cluding Banque du Caire, e-Finance, Abu Qir Fertilizers or Alexandria Container and Cargo Handling. The choice depends on market conditions, the opinion of each trans-action’s advisors and the views of Cabinet.

Following March 2018 amendments to the Capital Mar-kets Law of 1992, the Financial Regulatory Authority (FRA) issued regulations to activate short selling in February 2019. In May, the EGX revealed the list of 30 securities el-igible for short selling, which will be reviewed every six months. Eligible stocks must qualify as frequently traded, with at least 10% of registered brokerage firms trading the shares in question and free-floating shares having a turnover rate of 20% or more.

The FRA began handing out short selling licenses to

brokerages in June, with 51 licenses granted as of No-vember. On December 1, short selling went live on the local bourse. “Part of any stock market’s development and maturity includes new, more sophisticated tools to deepen the market—like short selling,” says Actis’ El Kholy. Addressing potential risks to activating short selling, he adds, “We need to make sure short selling regulations are prudent to ensure that it doesn’t result in any market shocks or market manipulation.”

In July 2019, the EGX also began looking at incentives to drive new listings, stimulate market activity and lure more foreign investors into Egyptian stocks. One proposal is a seven-year, 50% tax break for companies listing 35% or more of their stock on the EGX, effective from the IPO execution date. Incentives could also include tax breaks on cash dividends for already listed shares at fixed dis-count rates. In October, the FRA approved a proposal to cut regulatory fees on EGX transactions. Also in October, the Ministry of Finance approved proposals to scrap the capital gains tax and slash the stamp tax by as much as a third to 0.1%, down from a current 0.175%. Both propos-als are pending Cabinet approval.

Proposed cut New rate

Trading service fees 0.025% 20% 0.005%Clearing house fees 0.0125% 20% 0.01%Stock broker fees 0.010% 17% 0.0120%Charges on trading insurances 0.01% 50% 0.005%

Current rate

FRA’s Proposed Regulatory Fee Cuts

New Stock Tickers n EGX Total Returns Index

To deepen the market and address investor needs, the EGX launched the EGX30 Total Returns Index (EGX30 TR) on August 22, 2019. The EGX30 TR, which includes the same companies listed on the EGX 30 (based on liquidity

and activity), is also weighted by the adjusted free-float market capitalization. To help investors see their total return on investment, the new index accounts for dividends and prices together (rather than only the price change) and uses stocks’ last prices rather than closing prices. Published with a base date of February 1, 2009 and a base value

of 1,000 points, the EGX30 TR gives more weight to companies with higher reinvested income returns.

n Commodities Exchange In September 2019, the EGX announced that Egypt’s first agriculture commodities exchange would be launched by September 2020. Set up in partnership with the Ministry of Supply and Internal Trade, the exchange will buy

and sell futures contracts for industrial and agricultural commodities under a 20%-80% public-private ownership agreement. While the list of commodities traded is not confirmed, it could include flour, corn, iron, cement and oil.

Source: Local media



Capital Crunch

Source: EGX

OctoberSeptemberAugustJulyJuneMayAprilMarchFebruaryJanuary0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

November

Sectoral Performance (Jan-Oct 2019) Trading Activity by Sector(Jan-Oct 2019)

Bulk of Foreign Activityin Volume Terms (Jan-Sept 2019)

Average share of sector trading

Banks58.0%

Healthcare& pharmaceuticals

45.0%

Net (non-Arab) Foreign Purchases (USD million)

26.7%

Basic resourcesConstruction & materials

Industrial goods, services & automobiles

ChemicalsFood & beverageHealthcare & pharmaceuticals

Personal & household productsReal estate

Financial services excluding banks

TelecommunicationsTravel & leisure

Banks

18.9%

9.9%

8.7%

9.9%1.6%

-0.6%-17.3%

-9.0%-26.1%

-25.7%-24.2%

% ofVolumeTraded

TelecommunicationsReal estateFinancial services excluding banksTechnologyHealthcare & pharmaceuticals

Personal & household products

Industrial goods, services & automobiles

Travel & leisureOthers

% ofValue

Traded

18% 14%

29%

11%

18%15%

12%

14%

13%11%

6%5%

5%4%3%

3%

5% 15%

3.9 3.8

1.9 1.8

0.5 -0.08-0.06

-1.03 -4.2

-0.4

1.20.2

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2018

3.823.1

34.0

20.2

46.3

57.854.8

44.2

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

25.6

17.113.5

7.9

3.9

2.72.1

2.2

3.9

6.6

5.05.5

Technology28.5%

Personal & household products

40.7%

Food& beverage

36.8%

-0.2 -0.7 -0.5

0.5 0.1 0.2 0.08 0.2

-0.3 -0.2Jan Feb Mar Apr May Jun Jul Aug Sep Oct

2019

Trading value (EGP bil lion)Trading volume (billion securities)

Trading Aggregates

EGX Indicators



Sovereign wealth funds (SWFs) are state-owned investment funds used worldwide by governments to manage their national savings. They typically invest globally in real and financial assets such as stocks, bonds, real estate, precious metals or in alternative asset management investments such

as private equity (PE) or hedge funds. In October 2019, Egypt’s government launched its first SWF—Tharaa (Arabic for wealth)—to maximize the value of public sector assets. News of Tharaa first emerged in June 2018 after the government ratified the Sovereign Wealth Fund Law 177 of 2018, which governs the struc-ture and function of SWFs in Egypt. The plan was to launch the fund by 2018’s end but the global emerging market (EM) sell-off and tightened global conditions delayed its execution.

Tharaa was created to steer investment toward lucrative sectors including agribusiness and food processing, phar-maceuticals, infrastructure and logistics, power and tourism. It will operate through three partnership models. In the first, the SWF partners with private-sector investors; in the second, Tharaa partners with other SWFs; and the third model involves public-private partnerships, joint ven-tures (JVs) and other sub-funds with the private sector. The EGP 200 billion (USD 11.7 billion) fund plans to grow its authorized capital to EGP 1 trillion (nearly USD 60 billion) over the medium term through a diversified portfolio of investments and partnerships.

EXPLOITINGSovereign Capital

Private Investment by Sector (FY 2018/19)

Total=EGP 484.2 billion (USD 28.5 billion)

Natural gas21%

Real estate17%

12%10%

ICT9%

7%

Wholesale & retail

Agriculture

4%

5%

Other15%

Transportation

ManufacturingElectricity

Source: Central Bank of Egypt

Finance chap 6 Box.qxp_Layout 1 1/16/20 2:18 PM Page 45


Capital Crunch

Largest SWFs by Total Assets (2019)

Rank Fund Total Assets (USD billion) Region

1 Norway Government Pension Fund Global 1,098.8 Europe2 China Investment Corporation 940.6 Asia3 Abu Dhabi Investment Authority 696.7 Middle East4 Kuwait Investment Authority 592.0 Middle East5 Hong Kong Monetary Authority Investment Portfolio 509.4 Asia6 GIC Private Limited 440.0 Asia7 National Council for Social Security Fund 437.9 Asia8 SAFE Investment Company 417.8 Asia9 Temasek Holdings 375.4 Asia

10 Qatar Investment Authority 328.0 Middle East

According to the Sovereign Wealth Fund Institute, Egypt’s Tharaa currently holds USD 12 billion in total assets and is ranked 42 worldwide, 11 in the Middle East and second in Africa.

Tharaa will use the PE model to offer stakes in compa-nies and projects across industries. Since its launch, the fund has received seven offers from investors for poten-tial partnerships in healthcare, pharma and agricultural manufacturing ventures. Tharaa also sealed a USD 20 billion JV agreement in November 2019 with the Abu Dhabi Development Holding Company, the UAE gov-ernment’s investment arm, to establish an investment platform to inject capital in a number of sectors. The fund is also in control of the Siemens/Orascom Construc-tion/Elsewedy Electric combined-cycle power plants (lo-cated in Burullus, Beni Suef and the New Administrative Capital), in which a number of players are looking to ac-quire stakes. According to Tharaa’s Soliman, the plan is to sell shares of one plant by the end of 2020, with stake sales for the other two plants to follow. The transaction

falls under Tharaa’s energy sub-fund. The SWF has three other sub-funds in the works: the tourism and antiquities fund will see the light by 2019’s end, while the manufac-turing-focused and agriculture/agro-industrial funds have undisclosed timelines.

Bidding for a 70% stake in Tharaa’s power plant transaction are emerging market PE giant Actis, France’s global electric utility company Engie, China’s Datang Overseas Investment Company (operating in power and engineering contracting), energy-focused PE business Blackstone Energy Partners’ Zarou, and Southeast Asia’s power producer Edra Power Hold-ings. Local investors are also taking part: Egypt’s Elsewedy Electric expressed interest but had not an-nounced an official bid. The electric and wind energy producer is also eying other potential SWF investment opportunities in the natural gas sector. Orascom In-vestment Holding’s Executive Chairman Naguib Sawiris also expressed interest in investing with Tharaa in Egypt’s mining sector.

“Egypt is among the most attractive emerging mar-ket economies today,” Tharaa CEO Ayman Soliman told local media in October. “It has strong fundamen-tals as well as the demographics, consumer market and [other dynamics] needed to drive growth.” He noted that Egypt’s above-average yields puts Tharaa at an advantage amid the currently challenging global

macro climate. “We have an 18-month window before traditionally strong emerging markets, which have seen a downturn this year, start picking back up again… Egypt managed to bring in hot-money port-folio investors in the worst of times thanks to high yields. Tharaa can leverage this to draw them into more long-term instruments.”

Source: Sovereign Wealth Fund Institute



PE involves a pool of investors or high-net worth in-dividuals (usually operating through a firm or a series of funds) acquiring controlling management and eq-uity stakes in private businesses, making it a key mile-stone in the target company’s capital-raising and growth cycle. “Investors have already moved into emerging market equities and bonds but remain un-derexposed to private investments in emerging and frontier markets,” said Richard Banks, consulting edi-tor for Euromoney Conferences, at the Egypt road-show in September 2019. “This is an opportunity which Egypt must take if it is to attract the capital flows it needs to develop its economy in a post-FDI age.”

Despite its market potential, PE penetration in Egypt remains low compared to peer economies. There are a few onshore PE funds, but local firms tend to base their funds offshore or establish atypical fund structures onshore such as investment holding com-panies.

According to Sherif El Kholy, Actis’ partner and head of MENA, Egypt’s PE industry has been around for a good 20 years, with EFG Hermes and the Com-mercial International Investment Company (CIIC) Fund the first large-scale PE firms in the country. “At the time, most funds were directed towards family businesses and SMEs [small and medium enter-prises],” El Kholy says. “The industry has since evolved, currently involving heavy activity in buyouts, expansion capital deals, replacement capital deals, and buy and build platforms. It is true that a lot of PE activity in Egypt is still driven by family businesses, but these types of businesses have been institution-alized and scaled up pretty well, making them lucra-tive for PE activity.”

As more fund managers move in to the market, the sizes of PE deals have progressively increased. Ac-cording to the global advisory services firm PwC, the majority of local and large regional PE firms occupy the mid-cap segment, targeting companies with mar-ket capitalizations between EGP 50-200 million (USD 3-12 million). There are a few key players occupying the large-cap segment (targeting companies with market capitalizations exceeding EGP 200 million) with average investment ticket sizes of USD 10-50+ million, mostly directed to ‘defensive sectors’ (those relatively resistant to market contractions) such as

food and beverages, education and healthcare. There are 18 PE firms in Egypt, the majority of which are large local players such as BPE Partners, Qalaa Hold-ings and Arab Moltaqa Investment (AMIC). “The mar-ket also consists of some regional players and a few global players like Actis,” adds El Kholy.

“Private capital can be a real and enduring source of investment for Egypt—if Egypt creates the right projects and the right legal environment for it to have a home in the country,” said Euromoney’s Banks. Up until 2017, PE inflows were stifled by an unfavorable business environment. Among the deterring factors, PwC listed the lack of minority investor rights protec-tion, bankruptcy law, and clear and transparent in-vestment regulations, as well as profit repatriation difficulties.

On the external front, a major scandal that unfolded in 2018 shook PE inflows to the whole MENA region. Dubai’s PE giant Abraaj, which was the region’s largest buyout fund, filed for provisional liquidation in June 2018 after it collapsed amid investors’ allega-tions it had mismanaged a USD 1 billion healthcare fund. The scandal significantly eroded institutional in-vestor confidence in EM-based private equity firms, including those in MENA.

The PE market has dramatically changed over the past two years. In July 2019, Actis acquired the rights to manage two PE funds previously run by Abraaj, which included investments in 14 portfolio compa-nies. El Kholy says his company wants to bolster the industry. “Abraaj definitely did affect the confidence and appetite for PE in the entire MENA region, which is one of the reasons why Actis decided to step in to salvage the situation,” he notes. Two other Abraaj funds were acquired by international investors.

Closer to home, the government has overhauled and introduced a bundle of laws to improve Egypt’s investment climate and increase foreign capital in-flows. “We are quite confident in Egypt’s PE business. 2019 has been a year of stabilization and momentum buildup,” says El Kholy. “Egypt’s biggest opportunity is to capitalize on building sizeable, scalable pan-African businesses. With Egypt heading up the African Union, there’s an opportunity to create more business ties between Egyptian and African busi-nesses and capitalize on investment opportunities that arise as a result of that.”

Egypt’s PE Scene


Transaction Lifecycle Concerns:• Lack of awareness of Egypt’s PE market among potential investors, limiting the potential for fundraising.• Fluctuating oil prices are limiting the ability of GCC investors to provide funding.

Concerns:• Egypt’s limited liability partnership (LLP) model does not allow for tax transparency. It prohibits investment of funds on behalf of others, and is therefore an unsuitable model for PE funds. • Regulatory framework does not encourage investors to establish onshore funds in Egypt.

Regulatory Fix: Amendments to the Companies Law (Law 4 of 2018)

Concern:• Corporate governance is often lax in SMEs, which impedes the due diligence process. This discourages some fund managers from investing in SMEs.

Regulatory Fix: MSME Law (draft)

Concerns:• Lax minority investor protection and solvency • Obtaining the necessary approvals for operations is a lengthy process that is not investor-friendly.

Regulatory Fixes: Companies Law 4 of 2018Bankruptcy Law 11 of 2018Investment Incentives Law 72 of 2017

Concern:• The NILEX is not considered an attractive option for listing due to the low trading volumes.

Investmentclosure

Investmentmanagement

Investment exit

Fundraising

Fund creation

Investmentorigination

Investmentnegotiation


Capital Crunch

Opportunities, Areas of Development and Legislative Enablers for Egypt’s PE Industry

Source: PwC


amcham egypt inc - finance chap 1.qxp layout 1 1/16/20 2 ... files...“we remain positive on egypt....

Documents