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Towards A National Strategy For Microfinance In Egypt

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Towards A National Strategy For Microfinance In Egypt

The National Strategy for Microfinance

“The International Year of Microcredit 2005 underscores the importance of microfinance as an integral part of our collective effort to meet the Millennium Development Goals. Sustainable access to microfinance helps alleviate poverty by generating income, creating jobs, allowing children to go to school, enabling families to obtain health care, and empowering people to make the choices that best serve their needs. Together, we can and must build inclusive financial sectors that help people improve their lives.”

Kofi Annan, United Nations Secretary-General, January 2005.

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LIST OF ABBREVIATIONS

ABA Alexandria Businessmen AssociationAFI Alternative Financial InstitutionAPR Annual Percentage RateBdC Banque du CaireBM Banque MisrCBE The Central Bank of EgyptCDA Community Development AssociationCGAP The Consultative Group to Assist the PoorCGC The Credit Guarantee Company for Small & Medium Scale EnterprisesCIB Commercial International BankCIDA The Canadian International Development AgencyCII Community Investment InitiativeCIS Cooperative Insurance Society for Small EnterprisesCMA Capital Market AuthorityDAG Donor Assistance GroupEBI The Egyptian Banking InstituteEFB Egyptian Federation of BanksEISA Egyptian Insurance Supervisory Authority ERSAP Egypt’s Economic Reform and Structural Adjustment ProgramESMA Egyptian Small and Microenterprise AssociationEU European UnionGoE Government of EgyptGTZ The German Agency for Technical CooperationICT Information and Communication TechnologyIDSC The Egyptian Information and Decision Support CenterKfW German Development BankM/SMEs Medium, Small and MicroenterprisesMDG Millennium Development GoalsMFI Microfinance InstitutionMFIN Microfinance Institutions NetworkMISA Ministry of Insurance and Social AffairsMoCIT Ministry of Communication and Information TechnologyMoF Ministry of FinanceMoIC Ministry of International CooperationMoJ Ministry of JusticeMoMC Ministry of Mass CommunicationNAWW Non-Agriculture Wage WorkersNBD The National Bank for DevelopmentNGO Non-Governmental OrganizationNPA The National Postal AuthorityPBDAC The Principal Bank for Development and Agricultural CreditPS Private SectorRoSCAs Rotating Self-Help Savings and Credit AssociationsSANABEL The Arab Microfinance NetworkSFD The Social Fund for DevelopmentSMEPoL The Small, Medium and Microenterprise Policy Development ProjectSRO Self-Regulatory OrganizationUNCDF/SUM United Nations Capital Development Fund/Special Unit for MicrofinanceUNDP United Nations Development Program

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USAID The United States Agency for International DevelopmentWB The World Bank

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PREFACE

PREFACE

“Building a National Strategy for Microfinance in Egypt: A Sector Development Approach” is a project with the objective of developing a strategic framework for increasing the efficiency and effectiveness of concerted governmental, non-governmental and donor efforts to promote the development of microfinance in Egypt. Implemented by the Central Bank of Egypt (CBE) represented by the Egyptian Banking Institute (EBI), this project is co-funded by the United Nations Development Program (UNDP), The United States Agency for International Development (USAID), and The German Development Bank (KfW). Managed by the UNDP with the technical support of the United Nations Capital Development Fund (UNCDF), the project is advised by a project steering committee (SC) comprised of representatives from these organizations. The Social Fund for Development (SFD) is also represented in the steering committee, in recognition of its role as the entity designated for national coordination of all SME related activities, including the provision of financial and non-financial services1. The project is based on a consultative process which brings stakeholders together to deliberate on the challenges and constraints facing the microfinance sector in Egypt, as well as to identify the priority actions needed to address these in a manner that reflects commitment to a market oriented industry. To that end, the project included a number of activities aimed at providing the optimum setting and information required to ensure fruitful and productive deliberations. Moreover, the flexibility of the project design allowed for adjustments that recognized and accommodated developments taking place both in the economy and at the policy and industry levels.

Background Research relying on both primary and secondary sources was undertaken to determine the main issues confronting the sound development of the microfinance industry in Egypt and to explore the experience of other countries that have dealt with similar issues. Interviews with stakeholders were conducted and various relevant literature and databases were reviewed. The output, in the form of background reports, focused on the following:

1. Microfinance Sector Stakeholders’ Identification, indicating the degree of influence and involvement of different stakeholders in the microfinance sector;

2. The Institutional Framework for Microfinance Development in Egypt, highlighting the different lending instruments, as well as modalities and best practices from different countries;

3. The Legal and Regulatory Framework Affecting Microfinance, reviewing the different laws and legal changes required to enhance the microfinance sector;

4. Institutional Needs Assessment of Microfinance Institutions (MFIs), identifying the means for further development of different types of MFIs; and,

1 The German Agency for Technical Cooperation (GTZ) also provided the project with in-kind support, in the form of expert advice in the field of regulation. The Canadian International Development Agency (CIDA) provided advice to ensure that the strategy was gender sensitive.

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5. The Orientation and Interest of the Private Sector with regard to the microfinance industry in Egypt, providing a clearer understanding of the potential for its increased involvement in microfinance markets.

Based on the results of the research conducted, Round Tables (RTs) were organized with the objective of gaining a common understanding of key obstacles confronting the sector, and achieving consensus on priority areas for follow-up. Roundtable participants included microfinance practitioners; representatives of various banks, NGOs, ministries, donors, and MFI networks; in addition to local and international experts. An issue paper was prepared for each RT, and was disseminated to participants prior to the meeting. Accordingly, seven issue papers were prepared, and the RTs conducted corresponded to the following topics:

1. How to Best Utilize Banks in Microfinance;

2. The New Small Enterprise Development Law # 141/2004;

3. The Problems of Collateral, Guarantee and Recourse;

4. Non-Prudential Regulations and Performance Standards;

5. The Potential for New Microfinance Products and Services;

6. Guidelines for Donor Support to the Microfinance Sector; and

7. Strategies for Effective Capacity Building of the Microfinance Sector.

Policy Briefs (PBs) consolidated the recommendations synthesized from the RTs. These Policy Briefs were designed to be used both as lobbying tools, and as information to be disseminated to the wider public. The Policy Briefs tackled the following priority issues:

1. How to Best Utilize Banks in Microfinance;

2. How to Enhance the Role of NGOs in Microfinance; and

3. How to Achieve Coherence in Donor Support to the Microfinance Sector.

Study Tours (STs) were organized for 20 participants from stakeholder organizations, including banks, NGOs, the CBE, and the SFD. The objective of this exercise was to expose practitioners and policy makers to more mature microfinance markets, to see how they have developed, and how they have responded to the same kinds of challenges identified through the issue papers, as well as to explore their possible adaptation and application in the Egyptian Market.

The first ST was in Uganda, and it was designed to expose participants to the multi-tiered financial systems of banks, NGOs, and specialized microfinance institutions, exploring private sector engagement in the provision of microfinance services and product innovation. The second ST was in South Africa, and it aimed to provide an examination of the implementation and effectiveness of non-prudential regulation through a self-regulatory body using a voluntary membership model. It also presented the experience of a public-private credit bureau managed by a self-regulatory organization, and operated in the private sector.

Workshops were held for a total of 300 participants from stakeholder organizations, research institutions, and the media. The first - a kick off event - took place on May 31, 2004. The aim of the event was to announce the start of the project to the various stakeholders, introduce its

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objectives, and establish the framework for the subsequent consultative process that would result in the formulation of a national strategy for the integration of microfinance into the formal sector.

The second workshop was held in June of 2005. The purpose of this workshop was to assemble various stakeholders operating in the industry in order to present the outcomes of the year-long process; to advance the outcomes of the RTs into strategic recommendations and measures to be taken to implement the national strategy; and to secure endorsement for the resulting recommendations. The final event is the wrap up conference, during which a completed document is presented to stakeholders, who are called upon to reaffirm their commitment to the strategy.

This document presents a comprehensive microfinance strategy to increase the depth and breadth of outreach as well as the diversity of microfinance products offered. It proposes the implementation of the strategy over a time horizon of 5 years. It is the product of outputs from the above-mentioned activities and consultations, as well as input from the working groups conducted during the workshop in June. The document is organized as follows: the first section presents the context of microfinance internationally and in Egypt in particular, while the second section establishes the framework, vision objective, and orientation of the National Strategy for Microfinance. The third section details measures proposed at the micro level to develop financial institutions and systems that correspond to the financial needs of the economically active poor. Sections four and five discuss meso and macro levels, including the development of infrastructure, as well as the policy, legal and regulatory reforms required to support the viability of a vibrant financial system which integrates microfinance as a critical component. The final section includes the action plan and timeline, which specify measures that need to be enacted in both the short, medium and longer terms.

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ACKNOWLEDGEMENTS

This document is the result of an enriching collaboration between various experts and organizations concerned with microfinance, and represents an example of the concerted efforts being conducted by the Government of Egypt and its partners in development in support of the Egyptian microfinance sector. The consultative process used was designed to secure maximum involvement of stakeholders, to ensure that the result is a nationally owned strategy.

The strategy proposed in the document aims at increasing the depth and breadth of outreach and diversity of microfinance products, thereby decreasing the funding gap, and increasing access to financial resources by the poor. The document also presents an action plan for implementation over a five-year period.

It is hoped that this document, which reflects the recommendations of experts and best practices tested by practitioners, be adopted by policy makers in the government; the Central Bank of Egypt and other formal financial institutions; the Social Fund for Development (SFD); civil society; and other practitioners.

We would like to acknowledge the participation of the SFD in the steering committee and the process, and for the feedback received during the development of the document. Special thanks go to Dr. Ahmed Nassar at the SFD for his diligent and detailed comments on the strategy; and Mr. Azmy Mostafa, Ms. Hanna El Hilaly, and Mr. Michael Alcorn for their significant contributions.

We wish to thank all partners in the various organizations who have provided their support, and participated in the consultative process. In particular, we would like to recognize Mr. Martin Weiss from GTZ for contributing to the process and supporting the study tours; Ms. Eman Omran, from the Canadian International Development Agency (CIDA) for her feedback on the final document; and Mr. Gregory Goodwin, the SME Policy Development Project (SMEPoL), for his indispensable assistance.

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TABLE OF CONTENTS

EXECUTIVE SUMMARY ............................................................................................................ XI

I. INTRODUCTION ..................................................................................................................... XX

1. THE INTERNATIONAL CONTEXT OF MICROFINANCE ........................................................................................................... XX 2. MICROFINANCE IN EGYPT: ......................................................................................................................................... XXII

2.A. Who Are the Clients of Microfinance? ......................................................................................................... xxii 2. B. Where Does the Sector Stand? ................................................................................................................... xxiv

II. THE FRAMEWORK OF THE STRATEGY ................................................................... XXXI

1. THE VISION ............................................................................................................................................................. XXXI 2. THE OBJECTIVE ....................................................................................................................................................... XXXII 3. THE ORIENTATION ................................................................................................................................................... XXXII

III. THE MICRO LEVEL .................................................................................................... XXXIV

1. ENCOURAGE GREATER ENGAGEMENT BY MULTIPURPOSE BANKS IN THE SECTOR ............................................................. XXXIV 1.A. Provide Capacity Building Programs for Bankers .................................................................................... xxxiv

2. EXPLORE OPPORTUNITIES FOR PARTNERSHIPS WITH THE NATIONAL POSTAL AUTHORITY .................................................... XXXV 3. PROMOTE THE DEVELOPMENT OF PROFESSIONALLY MANAGED, FINANCIALLY SUSTAINABLE MFIS ..................................... XXXV

3. A. Support Product Development and Diversification Among Providers ...................................................... xxxv 3. B. Support Market Based Orientation in Capacity Building ....................................................................... xxxvii 3. C. Increase Information Technology Capacity ........................................................................................... xxxviii 3. D. Encourage Adherence to Reporting Standards and Performance Benchmarks .................................... xxxviii

4. STIMULATE THE USE OF ALTERNATIVE LOAN COLLATERAL PLEDGED TO MFIS. .................................................................. XL

IV. STRATEGY AT THE MESO LEVEL ............................................................................... XLI

1. BROADEN THE AVAILABILITY OF MARKET INFORMATION ................................................................................................. XLI 2. INCREASE THE AVAILABILITY OF CREDIT INFORMATION TO MFIS ..................................................................................... XLII 3. SUPPORT THE EFFICIENT FUNCTIONING OF FINANCING MECHANISMS FOR MFIS ................................................................. XLIII

3. A. Support the Sound Functioning of Existing APEX Institutions and National Guarantee Mechanisms ..... xliii 3. B. Facilitate Bank Wholesaling to NGOs ........................................................................................................ xliv 3. C. Promote the Development of Venture Capital Funds and Community Investment Initiatives .................... xlv 3. D. Promote the Securitization / Factoring of MFI Loan Portfolios ................................................................. xlv

4. SUPPORT THE BUSINESS SERVICE ENVIRONMENT FOR MFIS ........................................................................................... XLVI 5. SUPPORT THE ESTABLISHMENT OF A MICROFINANCE NETWORK ....................................................................................... XLVII 6. INSTITUTE THE USE OF INTERNATIONAL RATING AGENCIES ......................................................................................... XLVIII

V. STRATEGY AT THE MACRO LEVEL .......................................................................... XLIX

1. ENSURE GREATER COORDINATION AMONG MICROFINANCE INDUSTRY STAKEHOLDERS ........................................................ XLIX 1. A. Enhance Donor Coordination ..................................................................................................................... xlix 1. B. Promote Industry Stakeholder Dialogue ..................................................................................................... xlix

2. ESTABLISH A NON-PRUDENTIAL SELF-REGULATORY MECHANISM ....................................................................................... L 3. DEVELOP LEGAL AND POLICY FRAMEWORKS THAT ENHANCE OUTREACH AND REDUCE BARRIERS TO MARKET ENTRY .............. LI

3. A. Recognize Specialized Credit NGOs ............................................................................................................... li 3. B. Promote the Establishment of Non-Bank Commercial MFIs ........................................................................ lii 3. C. Recognize Alternative Forms of Collateral .................................................................................................. lii 3. D. Explore Options for Direct Retailing by the National Postal Authority ...................................................... lii

4. CONDUCT PUBLIC AWARENESS RAISING FOR MICROFINANCE STAKEHOLDERS ...................................................................... LIII

VI. CONCLUSION ..................................................................................................................... LIV

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ANNEX A: CGAP KEY PRINCIPLES OF MICROFINANCE ............................................. LVI

ANNEX B: MICROFINANCE GLOSSARY OF TERMS .................................................. LIX

ANNEX C: PROPOSED ACTION PLAN AND PRIMARY RESPONSIBLE ENTITIES .... 66

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EXECUTIVE SUMMARY

Introduction

For many years, Egypt has been the leading country in the Arab World in the area of microfinance, with the highest number of active microfinance borrowers and the largest outstanding loan portfolio. However many challenges remain and in order to address them constructively, the UNDP, KfW and USAID have jointly funded a project entitled “Building a National Strategy for Microfinance in Egypt: A Sector Development Approach”. The project aims at creating consensus among stakeholders as to the nature of the challenges facing the industry and the priority measures that need to be taken by the various parties involved in order to enable the industry to become more market-driven. The project was advised by a steering committee consisting of the executing partner (EBI) the funding donors (UNDP, KFW, and USAID), and the Social Fund for Development (SFD), which is mandated under Law No 141 of 2004- The Small Enterprise Development Law- to set the development strategy of the small and micro enterprise sector.

This document represents the outcome of 15 months of activity that has entailed round table discussions, workshops, study tours and extensive desktop research with the aim of formulating a strategy that is most appropriate to the development of Egypt’s microfinance industry. The stakeholders who have participated in the process are microfinance practitioners, representatives of ministries, donors, policy experts and representatives from MFI networks.

There is a consensus about a number of issues relating to what the industry lacks and accordingly what is needed. The microfinance industry in Egypt lacks clear direction or coordination - with institutions that face legal and regulatory obstacles, and an underserved market that is not being offered a sufficient range of demand-driven microfinance products. Accordingly, there is a need for the combined engagement of banks, non-government organizations (NGOs), and the private sector, all of whom would be operating in rational legal and regulatory environment to provide non-conventional products and services. Moreover, setting standards of performance for the industry, coordinating between the activities and resources of the government and donors, are perceived as crucial to the sound development of the sector.

The Framework and Objective of the Strategy

The proposed strategy targets “the economically active poor”, meaning “those who are not destitute”. 2 The economically active poor include the micro enterprise sector, and the vulnerable poor who are employed in low-salary jobs, both of whom are excluded, or underserved by the formal financial system. Accordingly, the development of effective, wide-spread, sustainable access to microfinance is perceived as contingent on building inclusive financial systems whereby the financial services needed by the poor, and the institutions that provide and support them, are integrated into the formal financial sector.

2 Marguerite Robinson The Microfinance Revolution. (Washington, D.C.: The World Bank, 2001).

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Such integration ensures that the poor will have the necessary financial resources that enable them to make critical decisions about their work, their life, and the welfare of their households.

The objective of the strategy is to develop, within the next five years, a microfinance industry in which sustainable financial services for lower market segments are integrated into the overall development of a broad, inclusive, and diverse financial sector. This will be achieved through adopting a Sector Development Approach, the success of which is ultimately measured by involvement of non-conventional 3 commercial financial players (multi-purpose banks, dedicated banks, credit-only financial institutions, NGOs, Cooperatives, etc.) in supplying different microfinance services to currently underserved client groups (most notably women, the rural poor, youth, and start-up businesses). This requires a broader, inclusive, multi-tiered financial system with lower barriers-to-entry, where a variety of public and private market players provide a broad range of services to micro enterprises and the poor in a sustainable and competitive sector.

Stakeholder commitment to placing the commercialization of microfinance at the heart of Egypt’s development agenda is critical to ensure that the proposed strategy, with its concerted vision and carefully crafted measures of reform, will yield the expected benefits.

The Levels of Intervention

This document identifies the areas of intervention required on the micro, meso and macro levels. Recommendations are made on how to address the issues and challenges on these three levels, specifying the measures to be enacted in the short (1 year), medium terms (2-3 years) and long term (4-5 years), as well the resources required for implementation.

The Micro Level

To promote the development of a range of sustainable, competitive MFIs that offer various valuable financial services to micro enterprises and the poor and cater to evolving market demand.

1. Encourage Greater Engagement by Banks in the Sector

It is necessary to eliminate the currently dominant perception that microfinance is simply about providing assistance to the "poor", and that micro clients are by definition "high risk" in order to persuade banks to fully engage their resources in the provision of financial services to the micro segment. It is therefore recommended as a high priority that a unit be immediately established within EBI to provide comprehensive MF capacity building programs to banks and build the bankers’ awareness of the commercial viability of micro finance. Prospective micro-bankers must understand the special characteristics of the target client group, as well as the specific business processes required so that they can apply microfinance best practices. It is imperative to aim at the capacity building of loan officers, as well as the different management and executive levels.

3 Other than government allocations, donor funds, and self-help groups.

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2. Explore Opportunities for Partnerships with the National Postal Authority

A potential partner through whom private banks can distribute micro-loans to a wider scale of clients is the NPA, which has an unmatched branch network, with 3,600 branch offices throughout Egypt. While the NPA has achieved significant outreach for saving services among low-income segments of the population, its legal mandate does not allow it to use this capital for the provision of credit. Therefore, banks could extend their breadth and depth of outreach by utilizing the post office network and avail funding for on-lending to the post office, with loans extended by regular post office employees or new recruits specifically tasked with microfinance. Another alternative would be for the bank itself to extend the loans utilizing the post office premises; however, in order to decide on the most viable alternative a thorough feasibility study of the options proposed (retail vs. MFI partnership), must be undertaken in the short term. The study must also identify the capacity building needs of the NPA if it is to be engaged in the provision of financial services. This study could be commissioned by the SFD as it is already in discussions with the NPA about an arrangement whereby the latter would distribute SFD funds.

3. Promote the Development of Professionally Managed Financially Sustainable MFIs

In order to achieve this goal, over the short and medium term, work has to be undertaken on the following three levels a) encourage adherence to reporting standards and performance benchmarks b) increase the IT capacity of MFIs c) support product development and diversification.

a) The establishment of a Self Regulatory Organization (SRO) that would set national microfinance standards and benchmarks, and then monitor that they are observed would encourage more willingness to engage in the sector. The adoption and implementation of a clear and unified set of financial reporting standards, and key performance benchmarks among microfinance providers will enhance the transparency and professional standards in the industry and ultimately its legitimacy. The SRO should include representation from governmental and non-governmental agencies, as well as national and regional networks. The MFI Network could commission a study on the legal and procedural arrangements for setting up a sustainable SRO in Egypt and the steps needed to ensure that it is institutionalized and rendered effective.

b) The development, upgrading and institutionalization of appropriate monitoring and control systems (including systems for automated loan tracking, impact tracking and credit scoring) and availing these systems to MFIs at affordable prices is of high priority. Particular attention should be given to supporting the efforts of local MFIs and the private for-profit sector to develop and upgrade their own systems. The upgrading of systems must be performed based on an evaluation of the quality of systems employed, and also of their reasonableness or “cost/benefit” to the MFI requesting to use the system. To that end, the first requirement is to develop and update a roster of available “tested” systems, and subsequently, the provision of support to MFIs in securing the best option available, including facilitating access to the

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required financial resources. Donors, along with government and APEX institutions such as the SFD and the CBE, are best situated to satisfy both of these needs.

c) The product range currently offered by the microfinance market in Egypt is relatively narrow. In accordance with microfinance “best practice”, product development is a systematic process that MFIs should undertake or commission to better serve their clients and to ensure the profitability of the institution. Yet, the cost and time that it takes to develop new products often act as a deterrent to MFIs. The SFD and the donors have a leading role to play in ensuring the capacity development of financial institutions to design and deliver financial products to underserved client groups. In addition to allocating part of their funding/TA for MFIs to design and pilot new products, donors could assist in the establishment of an innovation fund within the MFI Network that would encourage the design of new products and services that have the potential to reduce poverty, to promote gender equality, and redress geographical imbalances.

4. Stimulate the Use of Alternative Loan Collateral Pledged to MFIs.

To stimulate lending decisions by financial institutions, particularly for longer-term loans, the current use of collateral should be reviewed in order to facilitate the use of a broader range of mechanisms to secure credit. The SFD should take the lead in ensuring that this review includes potential forms of alternative collateral, such as informal housing and properties, movable assets, commercial papers (bills of exchange, bills of debt, and bills to order), social/peer pressure or unconventional collateral mechanisms. The results of the review should be disseminated among MFIs who are often unaware of the existence and applicability of these alternative forms of collateral.

The Meso Level

To develop a supportive infrastructure that provides MFIs with the required human, financial, capital and information resources to provide efficient and effective services

1. Broaden the Availability of Market Information

Providers of microfinance have a pressing need for up-to-date information on, and mapping of, the financial service needs of the economically active poor in relation to current market supply. Such information should be gathered and disseminated in a market-oriented manner, where individual financial service providers pay appropriate market prices for required data. In spite of the fact that a number of successful MFIs and donor agencies exist in the market, such an information template has not yet been created, primarily due to the lack of a designated champion for this activity - which could in the near future be the SFD and/or the MFI Network.

This issue of market information is directly linked to that of developing reliable market research tools. The technical challenge here is to determine the most feasible way to collect, update, and maintain information, as well as the best dissemination mechanism, and equally important, the sustainability plan for this activity. This is yet another potential role for the

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SFD and/or the MFI Network, who could test the demand for such products and provide it to MFIs on a fee for service basis.

To encourage such a market, international donors or government agencies can participate in the initial investment costs for developing reliable market surveys, poverty maps, gender analyses, as well as institutional mechanisms to support long-term sustainability. The criteria to funnel support should be in cases where there are: (1) real needs to be met, (2) a public good to be gained, and (3) clear plans for sustainability.

2. Increase Availability of Credit Information to MFIs

One of the concerns that contribute to the reluctance of commercial banks to provide microcredit is the lack of information on the credit history of the client. It is therefore imperative that a loan register or data base be created to provide information on clients to MFIs in terms of application for repayment of previous and/or current loans, and potentially other financial liabilities (such as utility bills, mobile phone bills, and other due installments). The creation of a loan register would require the adherence of all microcredit providers (both banks and NGOs) to supplying the credit bureau with updated client information. Such a requirement should be instituted by the CBE for banks, MISA for NGOs.

The loan register could be managed by one or more private sector credit bureaus. One of the major functions of an active credit bureau is to facilitate the link between smaller MFIs (that may lack technological infrastructure) and the national loan register. In view of the differences in MFI capacities and legal types, the credit bureau serving the microfinance sector should rely on a set of innovative techniques to collect and disseminate information that would suit the diverse needs of participating MFIs.

3. Support the Efficient Functioning of Finance Mechanisms for MFIs

MFIs should have access to local sources of funds for on lending. These sources are normally found in banks; insurance companies; and government, quasi-government, and local donor agencies. The mechanism to qualify for and access these funds should be aligned to best practice performance benchmarks, as well as government interventions and plans at the policy level. Accordingly, it is important in the short term that the SFD given its experience as an APEX institution together with donors undertake to support building the capacity of other institutions to assess MFI performance and to establish clear and unified financing criteria. In that context the CBE and MISA should review and amend the procedures to facilitate bank wholesaling to NGOs/MFIs.

Commercial lender guarantee schemes should be created and strengthened, and the current Capital Market Authority regulations changed to allow for securitization/factoring of MFI loan portfolios. Over the medium term, it is expected that MFIs that have already attained an advanced stage of maturity at the operational level, as well as a healthy financial position could increase their loan capital base by accessing pools of funds available to wholesale venture capital funds/companies. The SFD should coordinate with the CMA to ensure that

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the necessary amendments to the legislation are enacted so as to allow MFIs’ to access Venture Capital Funds.

4. Support the Business Service Environment for MFIs

This will entail a range of services that will be offered on the short, medium to long-term. The services include technical assistance to MFIs, performance monitoring, promoting linkages between local MFIs and international training service providers, loan officer certification programs, gender equality sensitization training and the provision of assistance to NGOs as they transform into commercial MFIs. Capacity-building programs and technical assistance should be provided by private organizations in a market-oriented manner. A roster of such organizations should be developed and updated by the representative body and/or the SFD, supported by specialized institutions such as the EBI, or international networks such as CGAP/WB, UNCDF/SUM, regional networks such as SANABEL (Microfinance Network of the Arab Countries), and national networks and associations such as The Egyptian Small and Microenterprise Association (ESMA). A concerted effort among the above mentioned institutions/networks could assist and monitor providers in curricula development, international best practices, trainer certification and quality control.

5. Support the Establishment of a Microfinance Network

The role of the microfinance network or forum representing all MFIs at the national level should be to support dialogue with policy makers; advocate for the policy reforms required to promote a more effective and gender responsive engagement and support to MFIs in the delivery of microfinance services; and foster collaborative relationships among MFIs. The network could assume the responsibility for setting reporting standards (including reporting to a loan register), and building consensus among stakeholders on the direction, growth and development of the microfinance industry. Donors could support the network by facilitating information exchange, disseminating tools, and providing capacity building support/programs. Such a network is actually being formed in coordination with the SFD, and while this is a positive development, the independence of this network and its objectivity needs to remain at the forefront of stakeholder concerns for reasons of credibility.

6. Institute the use of International Rating Agencies

The adoption and use of rating facilities/services for MFIs attests to their professionalism and diligence as MFIs. To that end, it is advisable for MFIs to resort to an internationally recognized assessment and rating facility (e.g. CGAP rating initiative), or to engage private sector raters (nationally and internationally recognized). These raters would offer a well-designed and independent evaluation and rating service to microfinance institutions. This type of independent evaluation should be instituted as a routine for MFIs, with a reasonable frequency (every 2 to 3 years). This certification should form the basis for MISA, donor agencies, banks and guarantee companies in determining the creditworthiness of MFIs and consequently, their eligibility to be financed.

The Macro Level

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To develop a policy and regulatory environment conducive to an inclusive financial system that encourages the growth and development of microfinance

1. Ensure Greater Coordination among Microfinance Industry Stakeholders

Coordination is required on two levels: coordination between leading microfinance stakeholders from governmental, non-governmental, private sector and international donors, to build consensus on an agenda and concrete measures to further the microfinance sector on the basis of this strategy; and, coordination among donors on how to best support this agenda. For the coordination to be effective it must be based on informed stakeholder industry dialogue. The Ministry of Insurance and Social Affairs (MISA), the Ministry of International Cooperation (MoIC), the CBE, and the media need to become more familiar with the complexities of micro finance and the means to support it. The donors should coordinate how to best support such an agenda. To allow for a more regular and focused discussion on relevant issues facing the microfinance industry, the SME subgroup of the Donor Assistance Group (DAG) is encouraged to consider the establishment of a specialized microfinance sub-committee.

The Small Enterprise Development Law commissioned the SFD to undertake the task of national coordination among all concerned stakeholders. This coordination must be based on a true spirit of cooperation and engagement.

2. Develop Legal and Policy Frameworks that Enhance Outreach and Reduce Barriers to Market Entry

There are a number of revisions of legislation that need to be considered. These revisions pertain to the executive regulations of the NGO law to recognize specialized credit NGOs; allowing the establishment of non-bank MFIs and the transformation of successful NGO into commercial MFIs; allowing other forms of collateral to be more easily enforced by courts than is currently the case; and, finally allowing the NPA to use collected savings for on-lending.

Despite the success of NGO’s to date, they have been constrained by certain aspects of the NGO Law No. 84, which treats all NGOs equally regardless of whether an NGO provides micro credit or not. The NGO law should recognize and classify NGO-MFIs as a special type of NGO, and allow the establishment of financial management and auditing standards, as well as approval systems for accessing capital, which are suitable for microfinance operations. This is perceived as a high priority intervention that should be considered by the SFD and MISA in the short term. Also of high priority is to allow new lending collateral that does not lead to criminal proceedings. The target must be to improve the capacity to enforce pledges and other collateral, without the threat of criminal sanction.

Allowing the existence of credit NGOs requires a change in the law and is not an immediate priority. Similarly, while allowing the NPA to use part of its collected savings for on lending, as well as authorizing it to engage in lending activities should be considered; however, it is

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not an immediate priority, but one that could be considered in the longer term after the NPA has gained experience in the microfinance sector through acting as a distributor of funds.

3. Conduct Public Awareness Raising for Microfinance Stakeholders

Raising public awareness among various stakeholders is important to establish the basis for a demand-oriented or client-driven microfinance policy. Hence a public awareness effort targeting government officials, decision-makers, potential actors and investors (NGOs, banks, the private sector), opinion makers (newspapers, the media) as to the economic and social importance of developing MFIs is required in order to promote microfinance as the commercially viable business that it is. The development of a focused promotional package, which would be streamlined as appropriate for different audiences, could be considered as the mechanism for such awareness building. The national MFI Network could take the lead in developing or commissioning the development of such a package.

In addition to the awareness campaign, a national award program could be initiated for MFIs adopting “best practices”, which would entice others to follow the same route.International development organizations, national and regional networks could play a vital role in disseminating microfinance state of the art information to existing MFIs, as well those planning to engage in the sector.

CONCLUSION

The strategy document represents the output of the consultative process that took place over the duration of 15 months with stakeholders deliberating over what a successful industry entails, and accordingly what measures needed to be enacted to develop the sector in Egypt. Undoubtedly, the consensus and continued commitment of stakeholders, and increased coordination among them, will ensure that the strategy for the integration of microfinance into the formal sector helps in moving the industry forward, and in making it inclusive as well as sensitive to the needs of the target population groups, “the economically active poor”. The SFD should coordinate the implementation of the strategy, including the measures recommended in the action plan, in a participatory approach that engages all relevant stakeholders at each stage, in order to secure the successful and accelerated establishment of the vibrant microfinance sector envisioned for Egypt.

While the strategy has attempted to address the weaknesses in the environment that do not render support to the industry, it is important to recognize that there are elements of strength that the strategy can build upon to create a more enabling environment for microfinance in Egypt. These are the following:

♦ The political will of the government, which sees in the development of microfinance an alternative to underemployment, redundant government employment and unemployment.

♦ The continued interest of donors to support the development of the microfinance industry in Egypt.

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♦ The experience accumulated by practitioners (banks and NGOs) during the past 15 years, which has served to establish that microfinance is a commercially viable industry.

♦ The existence of a base of specialized technical services and loan tracking systems that can be built upon and developed.

♦ The recent effort coordinated by the SFD to establish an inclusive network among active MFIs could constitute an effective national mechanism to monitor the industry’s performance and ensure that it is adequately represented.

♦ The existence of the regional MF network, SANABEL, will enhance the access of the national MFI Network to regional and international developments in microfinance.

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I. INTRODUCTION

1. 1. TTHEHE I INTERNATIONALNTERNATIONAL C CONTEXTONTEXT OFOF M MICROFINANCEICROFINANCE

The term ‘microfinance’ refers to the provision of banking and financial services, primarily lending and savings products, to economically active poor clients who are generally unable to access services offered by formal financial institutions. Microfinance evolved as the result of an economic development approach that aims to provide support to low-income groups operating small-scale income generation projects and businesses by overcoming one of the main obstacles faced by poor people around the world, namely insufficient access to credit and other banking services offered through mainstream established banking systems. The formal financial system has traditionally viewed the poor as “un-bankable”, due to their perceived lack of collateral, small loan sizes, and low potential for repayment. Without access to formal financial services, the poor must often resort to borrowing from moneylenders at exorbitant interest rates; or participate in local rotating savings and credit circles, which require deposits, and provide inflexible loan amounts at rigid time intervals. These informal financial services are often very costly, risky, and inconvenient.

International experience over the last two decades, however, has demonstrated that poor clients are bankable, that investments in microfinance lead to poverty alleviation and economic growth, and that in order for microfinance to be truly sustainable, governments and donors need to see its development as an integral part of a nation’s formal financial system. The success of microfinance has challenged commonly held assumptions regarding lending to the poor, demonstrating that it is indeed possible to collect loans and cover the costs associated with lending to poor clients. Many established microfinance institutions have achieved long-term sustainability and extensive outreach. Indeed, by the end of 2003, microcredit institutions throughout the world had reached a total of 80.9 million clients, according to the Microcredit Summit Campaign; of these, 54.8 million microfinance clients were within the poorest economic strata when they took their first loan.4

By supporting poor entrepreneurs, the availability of microfinance contributes to the growth and improvement of small-scale businesses within a framework of private sector development. According to the UN Commission on Private Sector Development Report, a reform strategy that incorporates legal, financial, and structural reforms will eliminate the obstacles that block the expansion of the private sector in the poorest regions and communities in developing countries.5 Reforming the basic elements of a country’s economic environment will bring about changes in institutional frameworks that will unleash and foster the private sector at all levels. Poor entrepreneurs play a critical role in the emergence of local businesses, empowering local communities by creating employment opportunities, and increasing incomes, thus making a vital contribution to economic growth and poverty alleviation.

4 Sam Daley-Harris, “State of the Microcredit Summit Campaign Report 2004.” Microcredit Summit Campaign, (Washington, D.C. 2004), p. 3. http://www.microcreditsummit.org/pubs/reports/socr/2004/SOCR04.pdf5 “Unleashing Entrepreneurship: Making Business Work for the Poor.” United Nations Commission on the Private Sector and Development. (New York: United Nations, 2004). http://www.undp.org/cpsd/documents/report/english/fullreport.pdf

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During the past decade, the field of microlending for the poor has expanded from microcredit operations to include a broader range of financial services, including micro-savings, leasing, mortgage finance, payment transfers and insurance. Four main types of organizations currently provide microfinance services. Non-governmental organization microfinance institutions (NGO-MFIs) are nonprofit organizations that specialize in lending to microenterprises and the self-employed but are not usually licensed by government entities to handle deposits. Credit unions are member-owned and member-governed financial institutions that provide deposit and lending services exclusively to their members, who typically share a common professional or geographic bond. Microfinance banks are fully regulated, for-profit, commercial banks whose primary purpose is the provision of a broad range of financial products and services to micro and small enterprises. These include newly established or “Greenfield” microfinance banks and transformed NGOs. Commercial banks are mainstream traditional banks offering traditional banking services that introduced specialized microfinance services targeted to micro and small enterprises through a process of “downscaling.” In addition, a number of alternative financial institutions (AFIs), including state-owned development banks, postal, agricultural, and savings banks, as well as smaller entities like savings and loan cooperatives, provide a mix of basic financial services to their clients.6

Although the successes of microfinance have proven that financial services for the poor can have a powerful impact on poverty reduction, there remain a number of constraints and limitations to the development of the sector, especially with regard to NGO involvement. In addition to their limited sustainability due, in part, to their reliance on donor funding, many NGOs have not attained large-scale operations, and the quality of their accounting, financial reporting, and portfolio monitoring often remains weak.

In response to these challenges, microfinance practitioners have recently adopted a new approach that recognizes the importance of mechanisms supporting the integration of microfinance institutions into formal financial systems, thereby ensuring sustained access to financial services for significant numbers of the poor by providing greater access to capital, better protection of poor people’s savings, and increased legitimacy and professionalism of the sector.7 New innovations designed to foster this integration include changes in the regulatory environment, NGO transformation, mechanisms for increased gender responsiveness and the creation of partnerships between commercial banks and microfinance institutions. Reform of banking laws can create an enabling environment for the development of a wide range of financial institutions and products available to serve the poor. Banking laws designed to support the microfinance sector must encourage transparency, protect poor people’s savings, promote competition, and improve supervision.8 Changes to government supervised “prudential” regulations should ensure the financial soundness of MFIs to prevent the loss of small depositors’ money; oblige MFIs to follow standards that guarantee the general trust or the public’s confidence in the reliability of transactions; and ensure that MFIs abide by accepted reporting and professional standards. While not designed to verify the

6 Elizabeth Littlefield and Richard Rosenberg. “Breaking Down the Walls between Microfinance and the Formal Financial System.” (Washington, D.C.: CGAP, 2004 p. 4) http://www.cgap.org/docs/BreakingDownWalls.pdf.7 CGAP staff. “Microfinance Means Financial Services for the Poor.” Donor Brief No. 11. Washington, D.C.:CGAP 2003, page 1. http://www.cgap.org/docs/DonorBrief_11.pdf 8 Ibid

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soundness of an institutions’ financial status, “Non-prudential” regulations nevertheless help improve the legal framework for microfinance. These may include consumer protection laws, transparent reporting requirements, loan cost disclosure, complaint resolution procedures, and enforcement mechanisms.9

Finally, the increasing prominence of microfinance in the poverty reduction strategies of the leading international donor institutions has led to a number of notable developments, including the establishment of the Consultative Group to Assist the Poorest (CGAP) in 199510; the Microcredit Summit in Washington, D.C. in 199711; and the UN’s declaration of 2005 as the International Year of Microcredit12. These developments have led to international consensus on a number of microfinance “best practice” principles, agreed upon by CGAP member agencies (Annex A), and the incorporation of microfinance contributions in the Millennium Development Goals (MDGs).

2. M2. MICROFINANCEICROFINANCE I INN E EGYPTGYPT: :

2.A. WHO ARE THE CLIENTS OF MICROFINANCE?

The actual and potential clients of microfinance are defined as “the economically active poor”, meaning “those who are not destitute”. 13 “They are those who have some income and skills and can afford basic needs but not all.” 14 The enterprise sector, (comprising the economically active poor who are excluded or underserved by the formal financial system, and accordingly, targeted by most MFIs), is dominated by microenterprises. The vulnerable poor, also economically active, are employed in low salary jobs.

♦ The Micro Enterprise SectorMicroenterprises can be broadly categorized into three types, based on type of activity.15 The first type encompasses those engaged in Unstable Survival Activities: enterprises whose operators have not found other employment, and tend to have unstable enterprises for a limited period of time. Some cottage industries, crafts, trade, or animal husbandry activities fall into this category. The second type encompasses those engaged in Stable Survival Activities: enterprises that provide their operators with a modest but decent living without any real growth. Trade, craft and small service activities tend to fall into this segment. The third and final type involves Growth Activities: enterprises - usually productive - that have the potential to grow and become genuinely dynamic small enterprises.

9 Ibid.10 This World Bank-led multi-donor initiative aims to increase resources devoted to microfinance and to coordinate MF policy between international financial institutions, multilateral development agencies, and bilateral donor agencies. 11 Attended by 1,500 organizations from 137 countries, this conference launched a worldwide campaign to extend microcredit lending services to 100 million of the world’s poorest by 2005. Microcredit Summit Campaign, p. 3.12 United Nations. International Year of Microcredit 2005. http://www.yearofmicrocredit.org, July 2005 13 Marguerite Robinson Mobilizing Savings From the Public: Basic Principles and Practices (Kampala: SPEED-USAID, 2004 (Washington, D.C.: The World Bank, 2001). 14 Ibid.15 Joanna Ledgerwood Microfinance Handbook. An Institutional and Financial Perspective.Sustainable Banking with the Poor series. (Washington, D.C.: World Bank, 1999). Part 1.

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In Egypt, the bulk of the enterprise sector consists of those employed in unstable and stable survival activities. A recent update of the M/SME profile, using the CAPMAS census of 1996 as a reference base, indicates that 93.7 percent of all establishments in Egypt are microenterprises (employing less than 5 people), with 58 percent of these engaged in trade related activities, mostly of household commodities, including food and beverages. Loans requested are usually for working capital.16 Moreover, a demand survey that was conducted for promising M/SMEs in Egypt indicated that approximately 80 percent of microenterprises applied for loans for the purpose of buying working capital goods and services, with the purchase of machinery and equipment coming in second place.17 The uses to which capital is put indicate the tremendous importance that access to finance constitutes for the survival and growth of enterprises. Moreover, experience with the USAID funded program of microlending to existing businesses and groups of women has shown that providing access to finance can be a stepping stone towards increasing formalization within the sector.

The M/SME profile update also revealed that the M/SME growth rate in Egypt ranges from 1.06 percent to 1.25 percent, with the bulk of the growth in the microenterprise sector. As for their share in employment, microenterprises in Egypt create approximately 75,000 jobs each year, with reference to Non-Agriculture Wage Workers (NAWW). Egypt’s aggregate employment in 2002 accounted for 16 million workers; of which NAWW represent nearly 9.8 million. Of these 9.8 million, 34.7 percent work in the informal sector, accounting for 3,500,000 workers. In this informal sector, the largest concentration of employment falls within enterprises that employ from 1-4 workers, (microenterprises) accounting for almost 2 million workers and representing around 60 percent of the private non-agricultural informal sector’s workforce.18 Another interesting finding revealed that the largest concentration of workers lies in the L.E. 5 to 10 per day income segment for both the formal and informal sectors, accounting for almost 4.2 million workers, whereas 2,630,153 are in the formal sector and 1,492,863 are in the informal sector. Females working in this income group segment represent 48% and account for 232, 928 of the 485, 266 female workers working in the informal sector.19

♦ The Vulnerable PoorThe second group of microfinance clients is that of the vulnerable poor who are employed in low salary jobs, including government employees and others undertaking menial jobs. This

16 “Profile of M/SMEs in Egypt Update Report” (Cairo: EQI) Submitted to the Small & Medium Enterprise Policies Project (SMEPol), June 2005, p 617 Mahmoud El Gammal, et al, Beyond Credit: A Taxonomy of SMEs and Financing Methods for Arab Countries, The Egyptian Center for Economic Studies – Working Paper Series No. 57, May 2001 p 9-141816Alia El-Mahdi. “GPN Global Labor Market Database: Egypt.” Posted to GPN on 10 October 2003. Global Policy Network. 19 Mona Amer et al., The Egyptian Labor Market in an Era of Reform (Cairo: An Economic Research Forum Edition, The American University in Cairo Press: 2002).

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group usually relies on informal saving mechanisms (RoSCAS), moneylenders, family and neighbors to help them out with their temporary cash needs. While this group does not represent the main or primary beneficiaries of a strategy aiming at integrating microfinance into the formal sector, (the primary beneficiaries being the microenterprises whether existing or start ups), given that the strategy aims at enabling the poor to make better choices about their life through access to finance, there is no valid reason why individuals with steady jobs, albeit low paid ones, cannot benefit from microfinance services and goods. Reality on the ground shows that a certain amount of the lending to enterprises does in fact go to uses that are not necessarily related to the business; moreover, salaried individuals often have small income generating activities to complement their regular salary. Finally, the risk factor in providing such individuals with access to microfinance does not exceed that associated with lending to start up businesses. In effect, the reverse is probably true.

2. B. WHERE DOES THE SECTOR STAND?

For many years, Egypt has been the leading country in the Arab World in the area of microfinance, with the highest number of active microfinance borrowers and the largest outstanding loan portfolio.20 The engagement of a number of banks together with NGOs has contributed to the growth of microfinance in Egypt. However, the access of poor and low-income households to financial services remains lacking in terms of both service outreach and product diversity. The outreach gap estimate reported in most studies is 90 percent. Moreover, an independent desktop study conducted by Environmental Quality International (EQI) in 2000, which compared public census information on each of Egypt’s governorates and the number of micro/small enterprises and credit programs active at the time, indicated that credit coverage does not reach 10 percent in virtually all governorates.21 Despite these estimates, banks and NGOs claim that they face considerable difficulty in accessing new clients. The main reason for this seeming contradiction lies in the fact that the supply of microfinance products and services in Egypt is limited to conventional forms of microlending (individual and solidarity group lending), while alternative credit and savings products remain largely untapped. A recent review of the accessibility to credit finance in Egypt revealed that both banks and NGOs operate within defined loan brackets, which means that they cater to a limited segment of the market that does not necessarily reflect the widespread potential that exists.22

“Although Egypt's commercial market is dominated by the micro-sector, it is apparent that formal credit demand has not reached its full potential. This can be attributed to a number of factors – whether low awareness amongst potential microclients as to the services available to them, or the inappropriateness of the financial packages offered to their credit needs. In this respect, we can assume that there is a strong need to tailor available services such that

20 UNCDF Microfinance Sector Development Approach: March/April 2003 http://www.uncdf.org/english/countries/egypt/microfinance/UNCDF_Egypt_MF-Country%20Assessment.pdf (August 2005)

21 Practitioners have cast doubt on these estimates, recommending that a full fledged study be undertaken to come up with a more accurate sizing of the gap, and a better understanding of the nature of the demand. 22 “Increasing M/SME Accessibility to Finance: Credit and Credit Guarantees in Egypt”, Egyptian Ministry of Finance, 2005 , p 18

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they cater and respond to the needs of the micro sector on the one hand, while increasing the outreach of existing lending mechanisms on the other.” 23

At present microlending services are provided through two main channels:

1) Public and Private banks regulated by the CBE and operating under Banking Law No. 88 of 2003

2) NGOs regulated by the Ministry of Insurance and Social Affairs (MISA), and governed under Law No. 84 of 2002.

Another major actor in the microfinance industry in Egypt is the Social Fund for Development (SFD), which was established through Presidential Decree No. 40 of 1991, to act as a “social safety net” against the impacts associated with Egypt's Economic Reform and Structural Adjustment Program (ERSAP). The promulgation of Law No. 141 of 2004 -The Small Enterprise Development Law- has mandated the SFD to set the development strategy of the small and microenterprise sector and to provide low-cost financing using its own funds, government appropriations and/or donor grants. Consequently, the SFD provides loan capital and operational subsidies to a variety of finance institutions, primarily banks that retail credit to end borrowers. Loan capital is provided through loans as well as grants. The law allows the SFD to establish its own credit disbursement units. In addition, Presidential Decree No. 83 of 2004 allows the SFD to establish "Associated Companies" in any of its development fields, such that these companies satisfy the SFD's objectives (mandates), and are in accordance with the Investment Law No. 8 of 1997.

At present, four main banks are engaged in microlending in Egypt. Banks extend credit using their own resources, or in their capacity as loan-managers either on behalf of donors, or more typically on behalf of the SFD. The National Bank for Development (NBD) has been providing financing for working capital since the late 1980s. The Principal Bank for Development and Agricultural Credit (PBDAC) started its rural finance program in 1993. More recent entrants into the sector are Banque du Caire (BdC), which started its microlending operations in 2001 and Banque Misr (BM) which began microlending in September of 2003. By virtue of an agreement signed with the Spanish Agency for International Cooperation in 2001, the Commercial International Bank (CIB) has been managing a microcredit fund, which it disburses through the NBD.

While public-sector banks have begun to engage in microfinance, most private commercial banks are still absent from availing funds to the micro sector and tend to regard microfinance either as too risky or as a developmental function that should be reserved for NGOs and those

23 Ibid

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public sector banks that have a large infra-structure base. These perceptions are not unique to financial institutions, but are also shared by the government machinery, the media, and the general public. The fact that most of Egypt’s microfinance initiatives, namely financing of working capital, have been donor-driven, subsidized, and aimed at poverty alleviation, has helped shape perceptions about the poor being "a high risk investment". Additionally, while it is true that line ministries and governorates have been instructed to promote microfinance in their respective fields, the commercial viability of microfinance and the credit worthiness of micro borrowers is a message that still needs to take root within government organizations. The conflicting policies and measures adopted by these entities, the fact that microfinance “best practice” is not always observed, and the shallow coverage which often characterizes media reports about microfinance reveal the absence of a common and shared understanding of the sector which needs to be addressed.

The initial reluctance of the bulk of the formal banking sector to engage in microfinance, and the lack of familiarity of the formal financial sector with the specificity of microfinance and with the particular needs of its clients has encouraged the disbursement of microcredit funds through NGOs. The NGO sector has been the pioneer provider of microlending services, and it is primarily due to its efforts that the profitability of microfinance has been established.

There are two categories of NGOs that are engaged in microlending. Those that are doing so on a relatively substantial scale are referred to as ‘specialized’.24 These specialized NGOs, some of whom have expressed the desire to transform into specialized MFIs, are managed by boards that possess not only a strong business background and ethos, but also an awareness of microfinance “best practice”.

The second category of NGOs, referred to as community development associations (CDAs), occasionally include microcredit as a component of broader community development programs. To date, these CDAs are content with the current modus operandi, and have no ambition to transform into MFIs.

This strategy gives particular attention to alleviating or at least relaxing the restrictive legal and regulatory environment in which the NGOs operate. For example, under Law No. 84 of 2002, NGOs are not allowed to capture deposits as a means of raising capital for refinancing, nor are they able to access commercial funds from banks and/or private investors. At the same time, they are unable to meet the prohibitive capital requirements for establishing themselves as specialized microfinance banks, which means that their ability to develop and introduce innovative approaches to servicing the industry is severely curtailed. Furthermore, significant delays are experienced by NGOs when seeking obligatory approvals from the Ministry of Insurance and Social Affairs (MISA) for the use of grant funds and loans from donor agencies and international organizations. These constraints severely curtail the ability

24 This refers in the first instance to NGOs operating under the USAID sponsored Small Enterprise Business Development Organization (SEB) program, who consequently have received considerable amounts of technical assistance and capacity building services.

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of NGOs to expand and introduce innovative approaches to servicing the existing microfinance market.25

Insufficient institutional capacity and inadequate structures of governance are obstacles to NGOs’ access to the huge pool of untapped commercial funds latent and awaiting the microfinance market. At the same time that access to capital is quoted by NGOs as a significant constraint preventing the expansion of their lending operations, banks have significant unutilized capital, estimated at L.E 155 billion,26 which is neither invested directly into microfinance, nor accessible to NGOs who are willing and able to serve geographically remote clientele and vulnerable groups. It is, nevertheless, important to recognize that the main constraint facing NGOs’ access to capital is weak institutional capacity, including inadequate reporting (clear and transparent), inadequate legal forms and the absence of a clearinghouse for information (self-regulatory body). Banks that are unwilling to act as direct suppliers of microfinance also find it difficult to consider acting as wholesalers of microfinance to be disbursed by specialized NGOs, until such issues are resolved.

Despite the wide variety of financial services that could be offered to micro consumers, microfinance institutions largely ignore them in favor of credit. Credit services provided in Egypt are dominated by two types of products: individual loans to finance the short-term working capital requirements of existing businesses, predominantly in the retail and mercantile sectors in urban and semi-urban settings; and group loans to support the income-generating activities of women in the lowest income categories. There are some examples of microcredit programs that provide non-collateralized agricultural credit, but these programs have been small in scope and have not always followed industry best practice. Larger agricultural lending programs, such as the lending facilities of PBDAC and credit lines developed through the European Union’s Agricultural Sector Development Program, follow traditional banking methodologies, which are inappropriate to microfinance clients as they depend heavily on formal collateral.

Other types of credit services, including agricultural lending products, asset-based lending, and micro-leasing products, have yet to be provided on a significant scale in Egypt. Although public and private sector banks offer savings accounts to the general public, the National Postal Authority remains the dominant provider of micro-savings due to its extensive outreach; and low-cost, simple application procedures. With regard to the insurance industry, state-owned companies remain the main providers of insurance services to this sector. While some of their products are affordable for microenterprises and micro

25 Interviews conducted with NGOs as part of the background research for the project confirmed the feeling among NGOs that their lending capabilities were severely constrained by bureaucratic procedures required by the law and by the ensuing delays that they faced in accessing commercial loans from banks and funds availed from donors for microfinance. 26 The unutilized bank deposits are estimated at L.E 155 billion. (CBE report, July 2004)

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consumers, these follow “product-driven” approaches that are neither designed nor marketed to meet the needs of the micro sector.

There are a number of reasons that combine to explain why MFIs restrict their services to credit lending. MFIs have been accustomed to receiving donor subsidies for so long that they have only recently begun to feel the need to penetrate new markets and develop new products. Another factor contributing to the focus on credit lending is that microfinance practitioners are not exposed to the latest technology in market research, IT innovations, insurance, and savings and leasing schemes that would allow them to diversify their services. Moreover, when these more sophisticated services are introduced, applied gender analyses will be essential to minimize the risk of a gender gap in uptake.

Limited knowledge regarding the characteristics and needs among MFIs is yet another obstacle impeding the development of new products and services. The internal business processes of most MFIs are not designed to serve the microfinance sector with efficiency and sustainability. The current outreach infrastructure, delivery mechanisms, risk calculation, and cost structures of most microlending programs are not compatible with the micro markets they serve. Service providers who have not had the opportunity to receive specialized technical assistance (TA) in microfinance best practice, or partner with institutions that have, remain unaware of potential financial returns or the means for capturing them. Again, this lack of awareness is partially due to the fact that microfinance has long been dominated by developmental initiatives that emphasize the social and economic impact of microfinance on employment, poverty alleviation and quality of life. As a result, private sector companies, which should be the engine of product innovation, instead regard the industry as a social cause rather than a profitable endeavor.

Limited awareness exacerbated by a weak information infrastructure act as deterrents to increased engagement in microfinance. The absence of specialized credit information bureaus and the lack of credit history information on microcredit clients, such as acquisition and repayment of loans from whatever source, credit card limits, history and repayment, utility bills, lease payments, legal searches through the courts for bad debts, and so forth, has led a situation which allows clients to borrow from several institutions simultaneously without their knowledge. Banque du Caire and Banque Misr have attempted to overcome this problem through a mutual agreement to exchange black lists of defaulting clients; however, this is not a sustainable solution, as it is not a prevalent practice among MFIs, nor does it put them under any obligation to exchange information regarding borrowers27.

Similarly, available credit guarantee institutions are not operating in the manner that would fulfill the needs of the MF industry. Only two organizations currently offer guarantee facilities, neither of which has been particularly successful at encouraging banks to extend financial services to microenterprises. In the case of the Credit Guarantee Company (CGC), banks consider the pricing of its guarantee products to be too steep.28 The Cooperative Insurance Society for Small Enterprises (CIS) was established by the SFD in 1999, and 27 The GoE announced in September 2005 its plans to merge Banque Misr and Banque du Caire, Egypt's second and third largest commercial banks, respectively. The merger is slated to be complete by March 2006.28 “Increasing M/SME Accessibility to Finance: Credit and Credit Guarantees in Egypt”, (Cairo: Egyptian Ministry of Finance, 2005) p 63

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serves as a credit insurance facility to small & microenterprises; however, an evaluation of its performance figures is difficult at the present time.29

The issue of collateral is also a crucial one when dealing with microfinance clients, whether they are microenterprises, or individuals (men or women). In either case, we are dealing with a segment of the population, which can at best be classified as low income, with its representatives engaged in informal or semiformal activities, or employed in low paid jobs. Both groups have difficulty in presenting “adequate” collateral. This means that unless a check is signed for the full amount of the loan plus interest, as a payment guarantee, the service provider will be reluctant to extend services. This form of check-based guarantee, which is totally unsuited to microfinance, entails that the debtor becomes subject to criminal accountability. In addition, the issue of collateral is particularly sensitive when considering the promotion of gender equality in Egypt. Given that women are less likely to possess assets that they are able to present as collateral (and that even when they do, their freedom to dispose of these is severely curtailed by cultural and social norms), collateral can become a barrier rendering women’s access to financial services even more difficult than for men.

Microfinance is an industry with its own special features, which differ substantially from conventional banking practice. As such it requires the development of very specialized skills among practitioners. Over the past 15 years donors have provided significant amounts of TA in the form of training to personnel in a number of lending organizations, in both NGOs and banks. This TA was provided through the contracting of specialized technical service providers, mainly from the US and Europe, in partnerships with local expertise, whenever available. And while this has led to the establishment of a hub of national capacity upon which to build, regrettably there are still not enough specialized local or training service providers, either private or public, that offer world-class training programs. Such training programs and technical assistance should be modified to fit the Egyptian context, and target the capacity building needs of loan officers and staff members at the various levels of management.

Recently, CGAP, in cooperation with the regional network for Microfinance Institutions (SANABEL) has started offering training on some microfinance management and operational topics including: Operational Risk Management, Financial Analyses, Accounting, and Product Development. The idea is to train selected practitioners and consultants to become CGAP-certified trainers through intensive Training of Trainers’ (ToT) programs. Under this initiative, CGAP/SANABEL conducted the first training course (on Operational Risk Management) at the Egyptian Banking Institute (EBI). Another course, on Product Development, was hosted by the Alexandria Businessmen’s Association (ABA) in Alexandria. There are a number of problems related to such training, the first of which is that it is implemented in a sporadic manner instead of being part of a coherent framework of sequential building blocks. The second problem is that the limited number of bilingual local practitioners and consultants presents a difficulty for some of the CGAP trainers to fully comprehend the materials, and consequently transfer the knowledge to MFIs. Finally, the

29 Ibid, p72

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limited number of people receiving the CGAP ToT could create, in the medium to long term, a pseudo-monopoly in training services; which could negatively affect the quality of training provided, the availability of trainers when demanded, not to mention pricing considerations. The point here is to continuously develop the capacities of MFIs in the processes and mechanisms required to deal with their day-to-day challenges and develop their capacities to respond effectively to market shifts and demand. In this context, CGAP/SANABEL training should be considered only one step in the right direction, but not the single solution to MFI capacity building needs.

The absence of stakeholder coordination has resulted in a waste of time and resources, and more importantly, in the creation of a market with many distortions. The absence of a clear map of who does what, how, and why is to say the least, confusing and does not serve the growth of the industry according to “best practice”. Efforts of government, non-government and donor organizations to develop the sector have been, until recently, scattered, and for the most part uncoordinated, thereby minimizing any benefits accrued to the industry. There are instances of duplication of MF activities in the same governorates, whether using similar or different interventions, and different (often subsidized) interest rates that distort the market. Other instances show very modest or no MF interventions, despite real need. This leads to geographical imbalances among governorates and within governorates, with a clear bias towards urban areas where MFIs choose to provide their services. The implications of such geographical bias on poverty intensification and a wider gender gap are significant.

In conclusion, the microfinance industry in Egypt can be described as lacking a number of necessary components, listed below:

• Clear industry standards based on “best practice” microfinance;

• Strong financial intermediaries and infrastructure support programs;

• An enabling legislative and regulatory infrastructure;

• Transparency among microfinance lending institutions;

• Access to reliable, up-to-date, market information on the financial service needs of the poor and microenterprises, of gender and geographical imbalances, as well as on the effective outreach of services provided by various actors; and

• Coordination among practitioners, the SFD and donors, as well as between donors and concerned government organizations.

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The National Strategy for Microfinance

II. THE FRAMEWORK OF THE STRATEGY

The proposed strategy targets the economically active poor, and is based on the premise that the commercialization of the microfinance industry promotes competitiveness and continued innovation, thus redirecting the trajectory of this sector from a subsidy-based to a market-induced approach. Accordingly, the way to ensure the development of effective, large- scale sustainable access to microfinance is to build inclusive financial systems that integrate the financial services needed by the poor, and the institutions that provide and support them into the overall formal financial sector, thereby empowering the poor to make critical decisions about their work, their life, and the welfare of their households. Gender equality, independence from donor support, and industry coordination are guiding principles for the strategy.

The strategy is built upon two core beliefs. The first being that the economically active poor and microenterprises will be best served when they have ACCESS to a wide range of services for the BEST possible PRICE; a CHOICE between different financial services and multiple providers; and access to accurate INFORMATION on which to base their choices. The proposed strategy is therefore pro-poor in the sense that rather than discriminating in favor of one target group to the exclusion of others, the services and products that are made available on the market are more attractive to the poor than they are to the non-poor.

The second core belief is that the achievement of the above objectives is most likely to occur when there is a free market for microfinance with multiple competing providers that are able to develop and deliver services that respond to client needs. Therefore, the private sector must play a dominant role; and the government must foster an enabling environment, which encourages private sector engagement.

The time horizon for the implementation of this strategy is 5 years. The strategy describes the main constraints/challenges that need to be addressed to develop the microfinance sector. Integral to the strategy is an action plan and time line specifying the measures that need to be enacted in the short (1 year), medium terms (2-3 years) and long term (4-5 years), as well the resources required for implementation.

The commitment of stakeholders to place the commercialization of microfinance at the heart of Egypt’s development agenda is critical to ensure that the proposed strategy will yield the benefits that are expected from concerted vision and carefully crafted measures of reform.

1. T1. THEHE V VISIONISION

Effective and sustainable access of economically active poor men and women and microenterprises to a broad variety of financial service products and service providers, through a vibrant and viable microfinance market with engaged stakeholders.

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2. T2. THEHE O OBJECTIVEBJECTIVE

To develop within the next five years a microfinance industry in which sustainable financial services for the lower segments in the market are integrated in the overall development of a broad, inclusive, and diverse financial sector.

Fulfilling the vision and achieving the objective requires the following:

The Government of Egypt (GoE) will pursue market-oriented financial policies and will work with the various stakeholders to pass the necessary legislation to promote a more enabling environment for an inclusive financial sector in the country. Ministries which have been working to develop the sector or to promote a specific segment of it, will continue doing so, coordinating with other stakeholders in order to make sure that their efforts are consistent with the direction of the National Strategy for Microfinance.30

The SFD will provide wholesale funds and technical assistance to MFIs according to internationally established practices in order to promote and expand industry standards for the sector.

Donors will assist in activities that lead to the broadening and deepening of microfinance services. They will work with the government and the SFD to support a more enabling policy environment; building MFI capacity to enhance the performance and outreach of a diverse range of service providers; promoting successful experiences and best practices in microfinance; and, facilitating linkages within and outside of the industry, and so forth.

Non-MFI Commercial Banks will provide wholesale funds and other services to MFIs. NGO-MFIs will continue providing microfinance in the areas where banks and eventually other financial institutions are absent. Otherwise, NGOs will provide the link between the poor and the microfinance institutions. More MFIs (banks and NGOs) will be market-oriented, professionally managed, sustainable institutions committed to serving the poor, and low-income entrepreneurs, with relevant and cost efficient services, independent from donor subsidies.

3. T3. THEHE O ORIENTATIONRIENTATION

Only through the mobilization of commercial capital can the provision of financial services be increased sufficiently to satisfy the vast demand for access to such services that the economically active poor and microenterprises require. This will be achieved through adopting a Sector Development Approach, which targets the full integration of microfinance in the formal financial sector, through the concerted action of respective government bodies, donors and financial intermediaries.

30 This refers specifically to the Ministry of Finance, the Ministry of Industry, the Ministry of Planning, and the Ministry of Insurance and Social Affairs, who have had programs dealing with the sector at the policy level.

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The success of the sector development approach is ultimately measured by the involvement of non-conventional31 commercial financial sector players in addressing the demand for different microfinance services by various client groups that are currently underserved (most notably women, the rural poor, youth, and startup businesses). This will require a broader, inclusive, multi-tiered financial system with lower barriers-to-entry, where a variety of public and private market players (multi-purpose banks, dedicated banks, credit-only financial institutions, NGOs, cooperatives, etc.) provide a broad range of services to small enterprises and the poor through a market-based, sustainable, and competitive sector.

In order to realize the vision and objective of the strategy, actions are needed on three levels:

3. A. THE MICRO LEVEL: the development of a variety of effective and efficient financial institutions that compete to effectively service the financial needs of microenterprises and the poor. Their role will be determined by the policy framework and by their comparative advantage in providing financial services that are client driven.

3. B. THE MESO LEVEL: the development of an effective infrastructure that provides financial institutions with the required human, financial, capital and information resources to provide effective services.

3. C. THE MACRO LEVEL: the development of a policy and regulatory environment that protects and promotes the viability of the financial system and supports the growth and development of the financial sector at the bottom of the market. This means gradually moving towards removing existing distortions in the financial market, increasing transparency, and implementing a market-oriented interest rate policy.

31 Other than government allocations, donor funds, and self-help groups.

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III. THE MICRO LEVEL

To promote the development of a diverse range of sustainable MFIs that compete to offer various effective financial services to microenterprises and the poor, and cater to evolving market demand.

1. E1. ENCOURAGENCOURAGE G GREATERREATER E ENGAGEMENTNGAGEMENT BYBY M MULTIPURPOSEULTIPURPOSE B BANKSANKS ININ THETHE S SECTORECTOR

While a small number of pioneering banks have already entered the microfinance market at the retail level, the provision of financial services to microenterprises and the poor is not yet a common feature of the banking sector. In order to persuade banks to fully engage their resources in the provision of financial services to the micro segment, it is necessary to eliminate the currently dominant perception that microfinance is simply about providing assistance to the "poor", and that micro clients are by definition "high risk". Microfinance programs have proved to bear a return on investment (ROI) that highly exceeds that from other banking services. This is evidenced by the commercial yield rate on microfinance portfolios for those banks and NGOs extending MF services, estimated at approximately 23 percent annual percentage rate (APR).32 This is due primarily to the high real rate of return on this kind of credit, and the low risk associated with microloans. Only through banks’ utilization of excess liquidity in extending microfinance services can they satisfy the vast demand for microfinance in Egypt. The lucrative nature of microfinance, as well as the credit worthiness of micro borrowers is a message that must be substantiated by tenable success stories and publicized through effective information campaigns.

1.A. PROVIDE CAPACITY BUILDING PROGRAMS FOR BANKERS

In order to achieve profits in the microfinance sector, prospective micro-bankers must understand the special characteristics of the target client group, as well as the specific business processes required to be successful. Banks must apply microfinance best practices such as providing mobile banking services (i.e. loan officers that operate outside bank branches), reducing cost structures, streamlining operating and application procedures and incentive systems, developing profit center approaches, and adopting appropriate marketing techniques integral to success in the sector.

The EBI could adopt the provision of capacity building programs to both banks and NGO-MFIs. Programs which could be delivered to bankers and MFI credit personnel in coordination with specialized technical service providers, should focus on character-based lending approaches, outreach and client solicitation, client evaluation, simple cash flow analysis, delinquency management, automated loan tracking systems, portfolio monitoring and performance analysis. It is imperative for these training programs to aim at the capacity building of loan officers, as well as the different management and executive levels. Recently, a number of technical service providers have started working with banks and

32 The independent rating by Planet Rating of four USAID funded MFIs (ASBA, SBACD, DBACD, ABA) indicates an average portfolio yield of 27.8 percent which is higher than average due to the maturity and solid financial position of these MFIs, therefore the above estimate is a conservative one. http://www.planetrating.com

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formal financial institutions to include microfinance as a new and integral product within the bank.

2. E2. EXPLOREXPLORE O OPPORTUNITIESPPORTUNITIES FORFOR P PARTNERSHIPSARTNERSHIPS WITHWITH THETHE N NATIONALATIONAL P POSTALOSTAL A AUTHORITYUTHORITY

Existing MFIs have not reached the depth and/or breadth of outreach needed to fill the gap between supply and demand. A potential partner through whom private banks can distribute micro-loans to a wider scale of clients is the National Postal Authority (NPA). This institution has an unmatched branch network, with 3,600 branch offices throughout Egypt. While the NPA has achieved significant outreach for saving services among low-income segments of the population, its legal mandate does not allow it to use this capital for the provision of credit. Therefore, banks could extend their breadth and depth of outreach by utilizing the post office network.

This would entail one of two modes of operation, the first being to avail funding for on lending to the post office, with loans extended by regular post office employees or new recruits specifically tasked with microfinance. The second mode is to utilize the post office premises, with loans being extended by bank employees. Under the first option, institutional capacity building programs are required to overcome the challenges related to changing the culture of the post office to provide loans instead of only capturing savings. Some of the challenges relate to instituting the culture of customer service and field outreach in service extension, the use of automated loan-tracking systems, and the application of an incentive system that is commercially based for loan officers, which would contradict the current payroll system of the NPA. In point of fact, the SFD and the NPA are discussing an arrangement whereby the latter would distribute SFD funds. Similar arrangements could be reached between the NPA and other MFIs. Although utilizing the NPA as an outreach mechanism could entail operational risks, the merits of this option should be determined in view of a full cost/benefit analysis.

3. P3. PROMOTEROMOTE THETHE D DEVELOPMENTEVELOPMENT OFOF P PROFESSIONALLYROFESSIONALLY M MANAGEDANAGED, F, FINANCIALLYINANCIALLY S SUSTAINABLEUSTAINABLE MFI MFISS

3. A. SUPPORT PRODUCT DEVELOPMENT AND DIVERSIFICATION AMONG PROVIDERS

The product range currently offered by the microfinance market in Egypt is relatively narrow. Until recently, MFIs have not been motivated to develop their existing product offering and services in response to the evolving needs of their clients. In accordance with microfinance “best practice”, product development is a systematic process that MFIs should undertake or commission to better serve their clients and to ensure the profitability of the institution. Yet, because product development related activities are costly and time consuming, MFIs should carefully weigh the costs of developing new products versus the option of securing them through specialized institutions under agency agreements. This is particularly true for insurance schemes, remittances, rural finance schemes, savings, microfinance housing schemes and so forth. Ensuring that the product development process is client or market driven is the way to ensure that the MFI retains its attractiveness to clients, and hence continues to operate profitably and on a sustainable basis. Moreover, the role of APEX33 / umbrella institutions like the SFD and CBE/EBI could be to document the lessons

33 APEX institutions are here defined as providers of wholesale financial resources to retail financial service providers, while Umbrella institutions are those providing wholesale non-financial services to MFIs.

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learnt from international and national practices, as well as to financially assist MFIs to offset some of the incremental costs arising from trying new and innovative services or service delivery mechanisms. Towards that end, a special fund for “innovative” products could be established with assistance from donor and government agencies.

Donors and relevant government institutions, such as the SFD, have an added role to play in ensuring the capacity development of financial institutions to design and deliver financial products to underserved client groups. Such capacity development should include the design of products that fit the particular needs of these groups, and methods for effective marketing and service delivery. Donor support should complement existing microfinance markets, and encourage the development of new ones. To this end, donors should move away from supporting and financing the provision of services that are currently provided by various market players. Instead, donors can further the introduction of new products in the microfinance market by focusing support to the microfinance sector on product development, rather than on capitalization.

Capitalization of service delivery should be limited to services and market segments that are currently underserved (such as women, youth, business start-ups, or rural lending). This can be achieved through donor provision of investment incentives and partial financing of market research and development costs. Moreover, funding study tours for MFI practitioners to visit countries where practitioners are exposed to innovative products and delivery systems that can be adapted to the Egyptian context is another area where donor support would be worthwhile. Donors should focus their efforts on building MFI capacity to enhance performance, and to facilitate linkages within and outside of the industry. However, while they should encourage the development of products that have the potential to reduce poverty, to promote gender equality, and to redress geographical imbalances, donors should not try and impose specific products onto the Egyptian market.

With regards to Gender Support, donors should aim to encourage the creation of products and services that take women’s special needs and constraints into account. This includes the design of a delivery system that better enables women to gain access to these products and services. “Women, particularly in Egyptian rural areas, have different levels of access to the market as well as different needs from their male counterparts.”34 The recruitment of more women employees within MFIs to work with women clients would constitute a significant step in the direction of developing gender sensitive products and outreach mechanisms.

With regards to geographical imbalances, rethinking the role of agricultural banks, alternative MFIs and eventually the NPA could pave the way to redressing much of the present inequality among governorates and between urban and rural areas. Setting up community investment initiatives (CIIs) that target and maintain resources within disadvantaged communities could also provide a solution to geographic imbalances. CIIs are deliberate actions taken by the executive to encourage local communities to generate, retain, and reinvest wealth, whether by directly investing in infrastructure, passing legislation in support of private investment, or enhancing the capacity of the target community to attract

34 Ghada A. Tawab, CIDA Egypt Program Gender Advisor. Interview in Development Express Newsletter, March 2005, Volume IV Issue 15

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investment. Such actions lay the foreground for interventions taken by responsible businesses in support of impoverished local communities.

The use of “smart subsidies” that would be directed towards the delivery of services and products that vulnerable groups can afford but that also enable MFIs to maintain sustainability could be considered. These subsidies should be used sparingly and only after poverty mapping and gender analyses have been undertaken to ensure that they are properly targeted and not abused.

The Central Bank of Egypt, the Egyptian Insurance Supervisory Authority and other relevant government agencies should re-evaluate their respective regulations and directives in view of their impact on the development and market entry of new financial services. This is particularly important for the introduction of services that are inhibited by the lengthy approval procedures related to entry licensing (especially for insurance and financial leasing) and the high financial resource requirements for licensing fees (including lump-sum “stamp taxes”). The CBE has recently issued a directive for the provision of small loans, which includes the loan amount, risk management functions, and loan provision policies. A similar directive that acknowledges the variation in target groups as well as extension and collection mechanisms is needed for microloans.

3. B. SUPPORT MARKET BASED ORIENTATION IN CAPACITY BUILDING

The know-how and institutional capacity to successfully engage in microfinance markets is not widely held in formal financial institutions. While appropriate knowledge and practices in smaller and simpler institutions, such as NGOs, are more established, these institutions continue to rely on external sources to finance their human resource development. Focus should be placed on the establishment and continuous development of high quality human resource and institutional development services and programs that allow institutions to build and continuously update the knowledge, skills and attitudes of their staff according to the evolving needs of the market.

A differentiation should be made between equipping MFIs with operational systems needed to adequately perform their service extension, follow-up, performance monitoring, and reporting functions, as opposed to knowledge and skills required to develop their products and services, as well as strategic and operational tactics to grow and increase the breadth and depth of outreach. While systems that can be developed and tested externally may be easily transferred to MFIs, securing financial resources for MFIs to acquire these systems can be a challenge. In addition, the ability of an MFI to independently assess its requirements relies heavily on the level of sophistication, relevance, and quality of technical assistance services received.

♦ HR Capacity Building

External support for human resource development in microfinance should be geared towards the development of training services, rather than their delivery. External support for institutions using human resource development training should be limited to the start-up period and should have a clear exit strategy. In absence of such an exit strategy, institutions

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become dependent on outside sources for a core business function, and will not bear the true cost of recruiting and retaining staff. Human resource development programs should include recruitment norms, gender sensitive working hours, performance criteria and systems of appraisal of personnel. Initiating grants to undertake capacity building and skills development training for directors, loan/business development officers, and management systems are important recommended measures in this area.

♦ Support NGO Transformation

The process of transformation from one legal identity to another is a complicated and costly one, especially when transforming from a civil society actor (NGO) to a formal financial institution (bank or company). Accordingly, the transformation process will require a full package of advisory and technical assistance services that will vary according to the legal identity of the institution in question, as well as its stage of maturity and financial position. Attention to the particular challenges of transformation and needs of NGOs, if and when the legal and regulatory environment changes, is in order. This includes TA focused on the managerial, technical and financial skills required (including good governance, board capacity building, internal control and audit) and ensuring that the proper skill sets are available. Also, donor support to the transformation process itself, once this is an option, could be envisaged. The provision of advisory and TA services should therefore be made available at affordable prices, while the scope and timing of services required should differ on a case-by-case basis.

3. C. INCREASE INFORMATION TECHNOLOGY CAPACITY

The development, upgrading and institutionalization of appropriate monitoring and control systems (including systems for automated loan tracking, impact tracking and credit scoring) and availing these systems to MFIs at affordable prices should be promoted. Particular attention should be given to supporting the efforts of local MFIs and the private for-profit sector to develop and upgrade their own systems. Moreover, systems that allow for the presentation of sex-disaggregated data should seriously be considered, as they would enable MFIs to accurately analyze demand of market segments and accordingly design products and services that address unmet demand.

The upgrading of systems must be performed not only based on an evaluation of the quality of systems employed, but also of their reasonableness or “cost/benefit” to the MFI requesting to use the system. To that end, the first requirement is to develop and update a roster of available “tested” systems, and subsequently, the provision of support to MFIs in securing the best option available, including facilitating access to the required financial resources. Donors, along with government and APEX institutions such as the SFD and the CBE, are best situated to satisfy both of these needs.

3. D. ENCOURAGE ADHERENCE TO REPORTING STANDARDS AND PERFORMANCE BENCHMARKS

The adoption and implementation of a clear and unified set of financial reporting standards and key performance benchmarks among microfinance providers, particularly NGO-MFIs, will enhance the transparency and professional standards in the industry and ultimately its legitimacy. It will enhance competition and facilitate capital providers to gain confidence in the industry in general, and in microfinance service providers in particular. Industry

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standards preferably applied through a non-prudential, self-regulatory mechanism should include the following:

♦ Unified Reporting and Financial Management Standards

Transparency requires clearer industry standards for good practice in poverty-focused microfinance; transparency in reporting on poverty outreach and impact; dissemination of information about best practices to the domestic APEX organization; knowledge on the amount and percentage of donor funds for the microfinance sector; knowledge on the outreach gap; and the amount disseminated from donor specifications. This requires two major interventions: the first is to avail MFIs with best practice approaches to measuring social impact; and the second is to provide capacity building to the self-regulatory organization (SRO) to promote and follow up on the timeliness and quality of MFI reports on social performance. Accordingly, standard-reporting systems should be implemented and endorsed by the recommended SRO.

Moreover, a transparent industry starts with comparable financial data. Accordingly, a common accounting, financial reporting, and financial management standard should be adopted by MFIs. More specifically, clear guidelines for financial statements’ adjustments should be in place to allow for comparing the performance of MFIs regardless of their size, financing structure, or legal type. To this end, an established self-regulatory mechanism should consider adopting CGAP’s financial statement disclosure standards.

However, there are difficulties in setting industry standards for a market whose players differ in both structure and mandate. Given that both NGOs and banks are active players in the Egyptian microfinance market, acknowledgement of these differences and their reflection in the design of policies aimed at setting industry standards in Egypt is important for their effectiveness. There is a need to have a single national body – such as the self-regulatory body previously mentioned – responsible for the development and monitoring of industry standards. This body can also be chartered with QA certification and licensing of MFIs and functions independently such as an accreditation agency for universities. In order to ensure that the differences in structure and mandate highlighted above are adequately addressed, it is recommended that this body include representation from governmental and non-governmental agencies, to include the SFD, CBE, as well as national and regional networks.

♦ Performance Benchmarks

Building on generally accepted accounting and financial reporting standards, a set of key performance indicators, and accordingly trends/benchmarks can be developed. Such a set of benchmarks can be used as a tool for self-evaluation by individual MFIs contingent upon the regular publishing of aggregate industry performance indicators. It will also allow potential MFI finance providers to compare performance between various MFIs.

Application of different incentives to MFIs so as to encourage compliance to these standards include giving them priority in receiving funds from donors or APEX institutions, availing them with sector-related information, and encouraging their participation in different capacity-building programs. Another incentive could be affording special recognition on a

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national scale for those MFIs that apply best practice standards, as well as adhere to continuous reporting to the SRO.

4. S4. STIMULATETIMULATE THETHE U USESE OFOF A ALTERNATIVELTERNATIVE L LOANOAN C COLLATERALOLLATERAL P PLEDGEDLEDGED TOTO MFI MFISS..

To stimulate lending decisions by financial institutions, particularly for longer-term loans, the current use of collateral should be reviewed in order to facilitate the use of a broader range of mechanisms to secure credit. Such a review should include the study of potential forms of alternative collateral, such as informal housing and properties, movable assets, commercial papers (bills of exchange, bills of debt, and bills to order), social/peer pressure or unconventional collateral mechanisms. In addition, there should be a strict adherence to an industry guideline with reference to checks, promissory notes and other instruments that does not enforce criminal sanctions. Moreover, the application of alternative collateral mechanisms would encourage the provision of microfinance services/products other than credit.

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IV. STRATEGY AT THE MESO LEVEL

To develop a supportive infrastructure that provides MFIs with the required human, financial, capital and information resources to provide efficient and effective services.

1. B1. BROADENROADEN THETHE A AVAILABILITYVAILABILITY OFOF M MARKETARKET I INFORMATIONNFORMATION

Providers of microfinance have a pressing need for up-to-date information on, and mapping of, the financial service needs of economically active poor and micro-entrepreneurs in relation to current market supply. The existence of reliable data on the number of active borrowers and the quality of the loan portfolio is a prerequisite for planning and efficient decision-making. Moreover, information is needed on the performance and operations of different MFIs, as well as on the non-financial services provided in the market. In principle, such information should be gathered and disseminated in a market-oriented manner, where individual financial service providers pay appropriate market prices for required data. In spite of the fact that a number of successful MFIs and donor agencies exist in the market, such an information template has not yet been created, primarily due to the lack of a designated champion for this activity - which could in the near future be the SFD / MFI Network.

To encourage such a market, international donors or government agencies can participate in the initial investment costs for developing reliable market surveys, poverty maps, gender analyses, as well as institutional mechanisms to support long-term sustainability. The criteria to funnel support should be in cases where there are: (1) real needs to be met, (2) a public good to be gained, and (3) clear plans for sustainability.

♦ Support the Development of Market Research Tools

This issue is directly related to the efficient utilization of resources available at donor, governmental, and quasi-governmental institutions. Information essential to both existing and potential MFIs can be classified into two types. The first type involves the size, structure, nature/characteristics, geographic distribution, and gender specific characteristics of active demand for microfinance services in its wider context (i.e. including savings, transfers, and insurance), and can be labeled 'demand-related' information; while the second type, which can be termed 'supply-related' information, involves an accurate and regularly updated mapping of service providers, including types of services offered, extension methodology, and additional relevant information on the economically active poor and entrepreneurs, as well as APEX/donor institutions planning to enter the microfinance field in Egypt.

As regards 'demand-related' information, it is imperative for existing and potential MFIs to have a reliable source of information on the targeted market, at an affordable price. The need for such information is normally paramount when planning for more market coverage, when developing a new MFI’s marketing plan, or even when designing new products within existing MFIs. In this regard, the cost of commissioning/undertaking sophisticated market surveys to assess current demand size and structure would be high, even for MFIs with solid financial bases, which is why financial support is needed. It is recommended that information is supplied to interested MFIs on a fee basis, which would create the resource base necessary

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for gathering information, updating surveys, and maintaining databases, which are integrated activities and services that could readily be undertaken by the MFI Network.For information on the 'supply-related' side, MFIs (especially new ones) need to have a clear picture about existing service providers, as well as the array of services currently being provided in order to encourage healthy competition and complementarities of action. Again this type of information should be provided on a fee basis to cover the costs of maintaining and updating this information. The technical challenge here is to determine the most feasible way to collect, update, and maintain information, as well as the best dissemination mechanism, and equally important, the sustainability plan for this activity. This is yet another potential role for the SFD and/or the MFI Network, who could test the demand for such products and provide it to MFIs on a fee for service basis.

2. I2. INCREASENCREASE THETHE A AVAILABILITYVAILABILITY OFOF C CREDITREDIT I INFORMATIONNFORMATION TOTO MFI MFISS

One of the concerns that contribute to the reluctance of commercial banks to provide microcredit is the lack of information on the credit history of the client. A Loan Register would provide information on clients to MFIs in terms of application for repayment of previous and/or current loans, and potentially other financial liabilities (such as utility bills, mobile phone bills, and other due installments). Moreover, an Automated Credit Scoring System can be applied to assess the degree of risk, and compute the client’s probability of default. Consequently, different MFIs would be better able to assess the risk exposure of their portfolios.35 The creation of a loan register would require the adherence of all microcredit providers (both banks and NGOs) to supplying the credit bureau with updated client information. This can be established by a mandatory requirement that credit decisions must be preceded by credit checks with the loan register, combined with a requirement that no information can be obtained from the loan register by institutions that do not themselves provide information. Such a requirement should be instituted by the CBE for banks, MISA for NGOs, and implemented nationally by the self-regulatory organization (SRO) proposed in section V.2. The development of an effective loan register will require satisfying legislative directives regarding the possibility of - and limitations on - the use of MFI clients' private financial information

The loan register could be managed by one or more private sector credit bureaus. One of the major functions of an active credit bureau is to facilitate the link between smaller MFIs (that may lack technological infrastructure) and the national loan register. Recent amendments to the Banking Law have finally included the provisions necessary for the establishment of credit bureaus. While this is an important step, it is nevertheless likely that entrants to this business will be credit bureaus geared towards the provision of banking and other types of traditional finance. In view of the differences in MFI capacities and legal types, the credit bureau serving the microfinance sector should rely on a set of innovative techniques to collect and disseminate information that would suit the diverse needs of participating MFIs. It is therefore recommended that a database, catering separately to that sector be developed, and that the establishment of a specialized "microfinance credit bureau" be considered.

35 It is noteworthy that SMEPoL has published such a system in its CCG report.

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3. S3. SUPPORTUPPORT THETHE E EFFICIENTFFICIENT F FUNCTIONINGUNCTIONING OFOF F FINANCINGINANCING M MECHANISMSECHANISMS FORFOR MFI MFISS

MFIs should have access to local sources of funds for on-lending. These sources are normally found in banks; insurance companies; and government, quasi-government, and local donor agencies. The mechanism to qualify for and access these funds should be aligned to best practice performance benchmarks, as well as government interventions and plans at the policy level.

3. A. SUPPORT THE SOUND FUNCTIONING OF EXISTING APEX INSTITUTIONS AND NATIONAL GUARANTEE MECHANISMS

APEX institutions and credit guarantee mechanisms could serve as appropriate intermediates in enhancing access to commercial capital for NGO-MFIs, or, in the shorter term, as a channel for donor financing of these institutions. The SFD is currently developing its capacity to act as an APEX institution, channeling donor funding to NGO-MFIs, as well as extending guarantee facilities to banks wishing to offer microfinance services either directly or through intermediaries. The SFD’s experience could provide a basis for commercial institutions, such as commercial banks, to either tap into the guarantees offered through the SFD and/or through international guarantee schemes and microfinance commercial (debt) funds, or even for banks to provide leverage to retail financial service providers.

International donors should coordinate their support to existing APEX institutions and credit guarantee mechanisms to ensure the compatibility of financing criteria and encourage the building of institutional capacity. A clear incentive for these institutions would be to include adherence to performance criteria, reporting, and achievement of an acceptable rating as conditions precedent to increased levels of donor funds channeled through these mechanisms. The development of healthy and sustainable wholesale finance mechanisms will require the following interventions:

♦ Establish Clear and Unified Financing Criteria

APEX Institutions that provide capital to MFIs should establish standardized financing criteria that are based on microfinance best practices. To this end, close coordination with a self-regulatory mechanism, (as proposed in section V.2.), and consensus on reporting standards and performance benchmarks would be essential.

As previously discussed, establishing reporting standards and performance benchmarking are considered pre-requisites for establishing clear, agreed-upon, unified, and objective criteria to prioritize supply to MFIs of institutional capital that includes requirements to cover loan funds as well as asset acquisition. The criteria should be based on international best practices and should include consideration of the MFIs’ productivity, profitability/cost coverage, portfolio quality, and asset utilization efficiency. Such criteria should also cover new MFI

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entrants to the market in terms of their business plan targets in comparison to national and regional benchmarks. The criteria and rating results should be portrayed as the minimum level of requirements for MFIs to be eligible for financing.

♦ Build the Institutional Capacity of APEX Institutions

APEX and Credit Guarantee Institutions should build the internal capacity of their systems and staff to analyze the performance of MFIs based on their financial reports and achievement of pre-established standards, as well as their governance and management, so as to make objective and justified financing decisions. Donor TA in this regard is deemed instrumental.

This entails that APEX institutions be actively engaged in the effort to agree on, and establish MFI reporting standards and format, as well as setting “Egypt-specific” industry benchmarks and performance standards. This will require providing necessary training and capacity building interventions to staff at APEX institutions to be able to assess MFI performance, to allow for comparing performance among different MFIs with different sizes and financing structures36. Appropriate resources should be allocated and plans established to fulfill this requirement.

3. B. FACILITATE BANK WHOLESALING TO NGOS

Bank engagement in microfinance is deterred by a number of factors, including the number of branch networks required for effective outreach to micro-clients. Private banks' branch networks provide limited geographic coverage, and despite the fact that a few public banks have branch networks that penetrate most of the 26 governorates of Egypt, their presence at the grass-roots level (where marginalized groups of clients exist) remains limited. In order to make up for the limited breadth and/or depth of outreach, banks could partner with non-bank MFIs in order to expand outreach to clients at the grass-roots level. Moreover, banks with limited experience in microfinance could benefit from the technical expertise in microcredit provision available within partner MFIs.

A potential opportunity for cooperation could involve the wholesaling of funds by banks to microfinance programs managed by NGOs. A mutually beneficial agreement can be secured, whereby banks function as microfinance wholesale institutions, while drawing on NGOs' outreach capabilities, experience and understanding of the nature of the microfinance sector and its clients. NGOs and other civil society actors have a better proximity and work force rapport with grassroots home-based enterprises serviced through solidarity group loans. These aspects should be carefully considered when attempting to create linkages between banks and other MFIs to increase access to financial services.

36 Steps have been taken to build the capacity of the SFD, covering organizational restructuring, staff training (including training in Geographic Information Systems-GIS), credit policies and standards preparation, and institutional upgrading of the regional offices.

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3. C. PROMOTE THE DEVELOPMENT OF VENTURE CAPITAL FUNDS AND COMMUNITY INVESTMENT INITIATIVES

In order to expand outreach of services, MFIs could increase their loan capital base by accessing pools of funds available to wholesale venture capital funds/companies. However, because of the rigorous requirements of venture capital companies/funds, this option would be restricted to MFIs that have already attained an advanced stage of maturity at the operational level, as well as a healthy financial position. Similarly, Community Investment Initiatives (CIIs) could enhance the capital base available to MFIs for funding micro and small businesses that have a competitive edge.37 CIIs represent strong and directed partnerships between public and private sector actors to support enterprising communities within a defined context and location.38 CIIs can take a variety of forms including community development credit unions39 , community development venture capital 40 , community loan funds41 , mutual guarantee societies 42 , social banks, and matchmaking /angel networks .43 In many instances, the benefits that result from such initiatives extend beyond the immediate geographic context, in which they are established and stationed, to contribute to increases in national growth rate

3. D. PROMOTE THE SECURITIZATION / FACTORING OF MFI LOAN PORTFOLIOS

In many cases, successful MFIs are unable to meet the demand for financial services in a timely manner due to cash shortages; since all available funds are already lent to clients. In such cases, allowing these MFIs to borrow funds against part or whole of their outstanding portfolios (current asset) at a discounted rate would provide them with an instant leverage mechanism to access more funds. Therefore, the securitization of loan portfolios44, or loans in arrears (at a discounted rate), would create a secondary debt market, and would free up capital for MFIs to increase outreach. A close review of current regulations imposed by the Capital Market Authority is required to assess the potential of such mechanisms in microfinance markets in Egypt. Securitization rules currently exist in the Capital Market Law, however, they have not yet been sufficiently applied and no track record exists in Egypt 37 “Community Investment Initiatives and MSME Development in Egypt” submitted to the Ministry of Foreign Trade, Small and Medium Enterprise Development Unit (SMEPoL) (Cairo, Environmental Quality International: 2004). 38 The study revealed that there were a number of Egyptian governorates where CII’s could be successfully promoted; also that matchmaking/ angel networking is the most suitable intervention in the short term and under the current legal and socio-cultural setting. On the medium and long term with a reformed legal and regulatory environment, additional CII interventions could prove effective.39 Non-profit cooperatives are those where member savings are transformed into shares to provide funding for lending activities.40 Operating in a manner similar to any venture fund, this fund caters to specific enterprises to the benefit of target community(s). 41 These are revolving funds that benefit the target community(s).42 Associations of small and medium enterprises pool savings to effect collective guarantees.43 “Community Development Finance Institutions”, UK Social Investment Forum, www.uksif.org/z/z/z/sgei/cdf/cdfis.shtml, July 2005, and “What are CDFIs?”, the Coalition of Community Development Financial Institutions, www.cdfi.org, July 200544 The securitization of loan portfolios enables financial service providers to resell their entire portfolio of outstanding loans contracts (or a part thereof, such as their loans in arrears) to a third party, normally at a discount. It is to be understood that this is a purely financial transaction and does not involve a new party taking responsibility for loan collection and management. Such a transaction reduces the risk exposure of the financial service providers and frees up capital for the provision of new services to additional clients.

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for undertaking such activities. Moreover, the current rules cater to the securitization of traditional, large and medium-sized financing.

Factoring may be a more suitable form of replenishing the lending resources of MFIs. Again, Egyptian Law does not sufficiently deal with factoring as a stand-alone activity, although this will not require a change in legislation.

4. S4. SUPPORTUPPORT T THEHE B BUSINESSUSINESS S SERVICEERVICE E ENVIRONMENTNVIRONMENT FORFOR MFI MFISS

Capacity-building programs and technical assistance should be provided by private organizations in a market-oriented manner. Training and technical assistance should be viewed by recipients as an investment and not as an expense (or even worse, as a donor giveaway), and they should therefore be willing to pay a fair price for these services. Only in this manner can a sustainable network of local service providers be developed. A roster of such organizations should be developed and updated by the representative body and/or the SFD, supported by specialized institutions such as the EBI, or international networks such as CGAP/WB, UNCDF/SUM, regional networks such as SANABEL (Microfinance Network of the Arab Countries), and local networks and associations such as The Egyptian Small and Microenterprise Association (ESMA). A concerted effort among the above mentioned institutions/networks could assist and monitor providers in curricula development, international best practices, trainer certification and quality control. This would also require that donors move away from directly providing TA to MFIs, and instead provide them with funding to out-source and pay for their own TA.

The creation of linkages with international training service providers and technical hubs is also important for the development of the industry. Careful attention is required to prevent the creation of a capacity building and training service market that is monopolized by a limited number of players. A healthy and progressive development of the sector requires allowing new service providers to enter into the market and advance the industry know-how, as well as to provide services in a competitive environment. The quality of services could be guaranteed through establishing a periodic assessment of service providers through routine independent or peer quality review or a designated QA agency in microfinance to ensure that they comply with best practice standards. A private sector approach where financial sustainability is a requirement will no doubt serve to validate its utility and added value to the sector.

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MFI business practices have been affected by the lack of informed service providers to cater for the requirements of loan officer capacities, as well as regular audits and ICT services. A high dropout rate is evidenced for loan officers, in part resulting from the current lack of recognition of their important role, where their colleagues in management positions look upon them as “second class” employees. The reality is that loan officers are the major “productive asset” employed by MFIs. Promoting the creation and maintenance of a professional cadre for loan extension at MFIs can be achieved by examining the merits of establishing a professional certification training program for loan officers/coordinators offered in collaboration with a national or international academic institution, and identifying similar programs in other countries and their relevance to the Egyptian context. In this respect, the donors' role could be to invest in supporting new or existing training facilities, which of course would require a market assessment and feasibility study as the first step.

On the other hand, independent audits and ICT are required for sound business practices. These are usually offered to MFIs by independent firms; however, information regarding the best service providers is often problematic for MFIs who are engaged in daily operational activities. The SFD and the MFI Network could support the development of a roster of auditors and ICT service providers that have experience in microfinance, thereby providing MFIs with the basis for acquiring quality services at competitive prices.

5. S5. SUPPORTUPPORT THETHE E ESTABLISHMENTSTABLISHMENT OFOF AA M MICROFINANCEICROFINANCE N NETWORKETWORK

A microfinance network or forum representing all MFIs at the national level is actually being formed in coordination with the SFD. This entity should support dialogue with policy makers; advocate for the policy reforms required to promote a more effective and gender responsive engagement and support to MFIs in the delivery of microfinance services; and foster collaborative relationships among MFIs. The network could assume the responsibility for setting reporting standards (including reporting to a loan register), and building consensus among stakeholders on the direction, growth and development of the microfinance industry.

Support for the establishment of this type of network is generated by organizing consultations bringing the various MFIs together to identify the most appropriate framework for their representation, and the role and responsibilities of the proposed entity. This could build on the experience of existing organizations, such as the SFD and ESMA, and capitalize on the fact that the Arab microfinance network, 'SANABEL', is located in Cairo.

This network could build on the wealth of information available through the SFD, the Egyptian Information and Decision Support Center (IDSC) and established MFIs. Donors could support the network by facilitating information exchange, disseminating tools, and providing capacity building support/programs. The board of this network should be expanded to include the MISA, the SFD, the CBE, donors, and representatives of commercial banks, as well as NGO-MFI representatives.

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6. I6. INSTITUTENSTITUTE THETHE U USESE OFOF I INTERNATIONALNTERNATIONAL R RATINGATING A AGENCIESGENCIES

The adoption and use of rating facilities/services for MFIs attests to their professionalism and diligence as MFIs. To that end, it is advisable for MFIs to resort to an internationally recognized assessment and rating facility (e.g. CGAP rating initiative), or to engage private sector raters (nationally and internationally recognized). These raters would offer a well-designed and independent evaluation and rating service to microfinance institutions. This type of independent evaluation should be instituted as a routine for MFIs, with a reasonable frequency (every 2 to 3 years). This certification should form the basis for MISA, donor agencies, banks and guarantee companies in determining the creditworthiness of MFIs and consequently, their eligibility to be financed.

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V. STRATEGY AT THE MACRO LEVEL

To develop a policy and regulatory environment conducive to an inclusive financial system that encourages the growth and development of microfinance.

1. E1. ENSURENSURE G GREATERREATER C COORDINATIONOORDINATION A AMONGMONG M MICROFINANCEICROFINANCE I INDUSTRYNDUSTRY S STAKEHOLDERSTAKEHOLDERS

The strategy development process highlighted the importance of regular consultations among stakeholders, striving to establish consensus on a strategic vision for the growth of the industry, and the concrete measures required to achieve such growth. The SFD, as mandated by the new Small Enterprise Development Law, is well positioned to take the lead in developing mechanisms through which such coordination can take place.

Coordination is required on two levels: coordination between leading microfinance stakeholders from governmental, non-governmental, private sector and international donors, to build consensus on an agenda and concrete measures to further the microfinance sector on the basis of this strategy; and, coordination among donors on how to best support this agenda.

The Small Enterprise Development Law commissioned the SFD to undertake the task of national coordination among all concerned stakeholders involved with and supporting the small and micro enterprise sector. It is important to note that for this coordination to be effective and successful, it has to be based on a true spirit of cooperation and engagement; i.e. not a coordination in the context of authoritative or regulatory stance over stakeholders and constituents.

1. A. ENHANCE DONOR COORDINATION

Ideally, donor coordination should be informed by a consensus among microfinance industry stakeholders and a clear agenda on the growth and development of the sector. In this case, donors should coordinate how to best support such an agenda. To allow for a more regular and focused discussion on relevant issues facing the microfinance industry, the SME subgroup of the Donor Assistance Group (DAG) is encouraged to consider the establishment of a specialized microfinance sub-committee.

This intervention would ensure the effective and efficient utilization of all resources targeting microfinance. The platform provided by the SME sub-donor group would be an ideal starting point to initiate microfinance coordination efforts. To this end, governmental and non-governmental agencies, institutions, and organizations active in the field of microfinance and not current members or observers to the group (the most notable of these being the CBE, the MISA, and a number of well established MFIs) should be invited to participate in these meetings on a periodic basis.

1. B. PROMOTE INDUSTRY STAKEHOLDER DIALOGUE

For coordination to be effective, it must be based on an informed industry dialogue among stakeholders. To that end, capacity building is required for relevant stakeholders, such as the Ministry of Insurance and Social Affairs (MISA), the Ministry of International Cooperation (MoIC), the CBE, the SFD, and the media. The MISA, for example, needs to become more

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familiar with the special nature of NGO-MFIs, particularly relevant to amending the NGO law to recognize credit-NGOs, and the resulting changes expected in the treatment of this type of NGO. The MoIC – which is the Egyptian governmental entity responsible for providing approval for donor funding – needs to conduct a comprehensive follow up and monitoring plan for fund disbursement, and a thorough assessment of the new funds needed. Regarding the SFD and its new role, as mandated by the new Small Enterprise Development law, a number of institutional capacity building programs have already been instituted (funded by the UNDP, KfW, EU, and CIDA). Finally, the media should be educated on the importance of the integration of microfinance into the formal financial sector, allowing them to play an advocating and promotional role when necessary.

2. E2. ESTABLISHSTABLISH AA N NONON-P-PRUDENTIALRUDENTIAL S SELFELF-R-REGULATORYEGULATORY M MECHANISMECHANISM

The establishment of an independent member driven and supported self-regulatory organization (SRO) to enhance the development of the sector by implementing a set of non-prudential regulations and ensuring MFIs’ self-enforcement for compliance with the specified performance standards is required. For institutions that confine their activities to credit, and are legally supervised by different governmental bodies, mechanisms of non-prudential regulation monitored by self-regulatory organizations (SROs) of which the regulated institutions are members and decision-makers, are the most suitable means to regulate certain operational aspects.

Such an organization would need a clear mandate, as well as technical and financial support from all key industry stakeholders. The microfinance network proposed in section IV.6 could effectively serve as a launching pad for such an organization. A non-prudential regulatory framework that recognizes the features of microfinance institutions is required. Moreover, rapidly maturing microlending NGOs are in need of governance structures to maintain a commitment to the target group of microenterprise clients. This necessitates the following:

Establishing reporting standards for MFIs (with proper distinction between different legal types, i.e. banks and NGOs)

Establishing a mechanism to provide regular reporting to the SRO in a user-friendly, automated manner, as well as the frequency for such reporting

Establishing a mechanism to disseminate consolidated information on the sector and MFIs to member institutions as a service in exchange for sustained commitment and submission of periodic reports

Recognizing the SRO by various donor agencies (i.e. including reporting to the SRO as part of the funding criteria for MFIs) so as to provide it with more legitimacy among MFIs and to encourage membership. This is considered the bottom line for the success and sustainability of the SRO, as MFIs will not be motivated to submit reports to the SRO unless they feel a material benefit from doing so.

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3. 3. DDEVELOPEVELOP L LEGALEGAL ANDAND P POLICYOLICY F FRAMEWORKSRAMEWORKS THATTHAT E ENHANCENHANCE O OUTREACHUTREACH ANDAND R REDUCEEDUCE B BARRIERSARRIERS TOTO M MARKETARKET E ENTRYNTRY

3. A. RECOGNIZE SPECIALIZED CREDIT NGOS

Despite the success of NGO’s to date, they have been constrained by certain aspects of the NGO Law No. 84, which treats all NGOs equally regardless of whether an NGO provides microcredit or not. The current financial management and audit standards, financial transaction approval processes, and administrative procedures required by the law are not suitable for microfinance institutions, which manage and administer large volumes of financial transactions. For example, regulations regarding signature endorsement for financial transactions must be performed by a limited number of the NGO’s officers. Given the large volume of financial transactions processed by microfinance NGOs on a daily basis, it is almost impossible to secure the signature of the NGO treasurer as needed, especially when this post is filled by a volunteer. This needs to be changed to allow an employee (the Microfinance Activity Manager) to sign checks for loan issuance if increased access to financial services is sought.

Additionally, MFIs operating under the NGO law face long, complicated and time-consuming approval procedures to access capital, whether from donors or commercial banks. Banks normally refrain from providing non-collateralized loans to NGOs for the following reasons: 1) NGOs’ decision making cadre is made up of volunteers who have a limited degree of accountability in case of defaults, 2) banks may face practical problems in foreclosing on NGO assets in case of default, in view of the status of NGOs as being under the prudential supervision of the MISA, 3) the lack of sound governance structures in many NGOs, 4) the lack of reliable and continuous cash flow, and 5) the fact that the legal framework for NGOs is not suitable for undertaking credit and finance transactions. All of these restrictions work to limit access to capital and therefore restrain outreach and growth. The solution to such problems might be sought in the legal, procedural, or even contractual arrangements between banks and NGOs. In addition, only those NGOs that have successfully undergone capacity building and qualification procedures (QA certificates) can become NGO-MFIs. The NGO law should recognize and classify NGO-MFIs as a special type of NGO, and allow the establishment of financial management and auditing standards, as well as approval systems for accessing capital, which are suitable for microfinance operations. Allowing the existence of credit NGOs requires a change in the law. In particular the law should (a) recognize credit NGOs as a distinct type of NGO, (b) determine how they are governed in order to ensure that they are not being abused by management, (c) allow them to access commercial funding, (d) allow them to make loans, offer credit, seize collateral in case of default, and enforce loan contracts (collect bad loans), (e) allow them access to credit bureau information, and (f) exempt them from certain current requirements governing NGOs with respect to their accounting, auditing, and right to receive funds and charge market-rate interest.

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3. B. PROMOTE THE ESTABLISHMENT OF NON-BANK COMMERCIAL MFIS

Specialized MFIs, such as cooperative banks, microfinance banks or commercial credit-only institutions, do not currently exist in Egypt. The existence of such service providers in the market could add greatly to the availability and outreach of a broad range of services. In the long term the microfinance strategy vision of effective access of economically active poor and micro-entrepreneurs to a broad range of financial services will most likely not be effectively achieved without the presence of a more varied range of financial service providers operating in the market.

With due regard for prudential safeguards that guarantee the integrity of the financial system and the safety of deposits, regulatory change should be considered to allow for the establishment of specialized financial institutions to serve microfinance markets in Egypt. At a minimum, the creation of commercial credit-only financial institutions should be considered in the Egyptian market. Such microfinance institutions would improve outreach and catalyze microcredit markets. This would require legislative change that would determine whether they are treated like banks or like NGOs for purposes of debt collection and foreclosure. Allowing these institutions to become deposit-taking could be considered; however, this would require that they be subject to prudential regulation. While this latter option is not an immediate priority, it is nevertheless one that should be considered on the longer term if they are to expand their portfolio to include deposit-taking services. At such time when regulatory change allows for the creation of commercial formal financial institutions, successful NGOs may begin to consider revising their legal status to transform into formal financial institutions; i.e. NGO-MFIs, in order to offer a greater variety of services (e.g., savings, insurance and remittances) thereby maximizing their output. Such transformation could significantly contribute to increased outreach and competition in the microfinance market.

3. C. RECOGNIZE ALTERNATIVE FORMS OF COLLATERAL

A change in legislation has to take place to allow other forms of collateral to be more easily enforced by courts than is currently the case. New lending collateral that does not lead to criminal proceedings should be recognized in the law. The non-possessionary pledge, mortgage of unregistered properties, and wider use of commercial papers are more suitable to microfinance. Group and other social guarantees must also be better explored. In all cases, the target must be to improve the capacity to enforce pledges and other collateral, without the threat of criminal sanction.

3. D. EXPLORE OPTIONS FOR DIRECT RETAILING BY THE NATIONAL POSTAL AUTHORITY

Allowing the NPA to use part of collected savings for on lending, as well as authorizing it to engage in lending activities could be considered. The current mandate obliges the NPA to transfer all funds collected to be invested by the GoE, and restricts its activity to savings collection and fund transfer. However, this option of allowing the post office to provide loans is not an immediate priority, but one that could be considered in the longer term after

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the NPA has gained experience in the microfinance sector through acting as a distributor of funds. In this case, donors can assist with the required institutional capacity building.

4.4. CCONDUCTONDUCT P PUBLICUBLIC A AWARENESSWARENESS R RAISINGAISING FORFOR M MICROFINANCEICROFINANCE S STAKEHOLDERSTAKEHOLDERS

Raising public awareness among various stakeholders is important to establish the basis for a demand-oriented or client-driven microfinance policy. Hence a public awareness effort targeting government officials, decision-makers, potential actors and investors (NGOs, banks, the private sector), opinion makers (newspapers, the media) as to the economic and social importance of developing MFIs is required in order to promote microfinance as the lucrative business that it is. This campaign must be based on a clear consensus among the government, the donors and the major players within the sector regarding the role of microfinance, the definition and classification of the target group(s), the understanding of its needs, and the responsibilities to be undertaken by the stakeholders in creating and maintaining an enabling policy environment. The development of a focused promotional package, which would be streamlined as appropriate for different audiences, and vigorously promoted in target areas, could be considered as the mechanism for such awareness building.

All of the above are called for and promoted as “best practices” in the international microfinance world. Moreover, international development organizations, and regional / national networks could play a vital role in disseminating this type of information to existing MFIs, as well those planning to engage in the sector. A national award program could be initiated for MFIs adopting “best practices”, which would entice others to follow the same route.

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VI. CONCLUSION

This document represents the output of the consultative process that took place over a period of 15 months. Stakeholders and participants in this process included microfinance practitioners (NGOs and banks), the SFD, ministries, donors, and MFI Networks, in addition to local and international experts.

It is important to note that a fundamental cornerstone for establishing a successful microfinance sector is the existence of a competitive macroeconomic environment that spurs economic growth and prosperity. In this context, it appears that governmental policies are indeed progressing in that direction. Furthermore, the enactment of the Small Enterprise Development Law # 141/2004 is a confirmation of the priority that the government has placed on developing Egypt's microfinance industry, and an acknowledgement of the critical role that the MSE sector can play in enhancing economic growth, including the mitigation against negative effects that certain macro policies might entail.

While the strategy has attempted to address the weaknesses in the environment that do not render support to the industry, it is important to recognize that there are elements of strength that the strategy can build upon to create a more enabling environment for microfinance in Egypt. These are the following:

♦ The political will of the government, which sees in the development of microfinance an alternative to underemployment, redundant government employment and unemployment.

♦ The continued interest of donors to support the development of the microfinance industry in Egypt.

♦ The experience accumulated by practitioners (banks and NGOs) during the past 15 years, which has served to establish that microfinance is a commercially viable industry.

♦ The existence of a base of specialized technical services and loan tracking systems that can be built upon and developed.

♦ The recent effort coordinated by the SFD to establish an inclusive network among active MFIs could constitute an effective national mechanism to monitor the industry’s performance and ensure that it is adequately represented.

♦ The existence of the regional MF network, SANABEL, will enhance the access of the national MFI Network to regional and international developments in microfinance.

Finally, the recommendations made in the strategy for the development of a multi-tiered system of financial institutions servicing the sector have been translated into an action plan specifying the responsibilities of the relevant stakeholder entities and the level of priority for implementing activities corresponding to these recommendations. Undoubtedly, the consensus and continued commitment of stakeholders, and increased coordination among them, will ensure that the strategy for the integration of microfinance into the formal sector helps in moving the industry forward, and in making it inclusive as well as sensitive to the

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needs of the target population groups, “the economically active poor”. The SFD should coordinate the implementation of the strategy, including the measures recommended in the action plan, in a participatory approach that engages all relevant stakeholders at each stage, in order to secure the successful and accelerated establishment of the vibrant microfinance sector envisioned for Egypt.

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ANNEX A: CGAP KEY PRINCIPLES OF MICROFINANCE

The Consultative Group to Assist the Poor

Key Principles of Microfinance

CGAP is a consortium of 28 public and private development agencies working together to expand access to financial services for the poor, referred to as microfinance. These principles were developed and endorsed by CGAP and its 28 member donors, and further endorsed by the Group of Eight leaders at the G8 Summit on 10 June 2004.

1. Poor people need a variety of financial services, not just loans. Like everyone else, the poor need a range of financial services that are convenient, flexible, and affordable. Depending on circumstances, they want not only loans, but also savings, insurance, and cash transfer services.

2. Microfinance is a powerful tool to fight poverty. When poor people have access to financial services, they can earn more, build their assets, and cushion themselves against external shocks. Poor households use microfinance to move from everyday survival to planning for the future: they invest in better nutrition, housing, health, and education.

3. Microfinance means building financial systems that serve the poor. In most developing countries, poor people are the majority of the population, yet they are the least likely to be served by banks. Microfinance is often seen as a marginal sector—a “development” activity that donors, governments, or social investors might care about, but not as part of the country’s mainstream financial system. However, microfinance will reach the maximum number of poor clients only when it is integrated into the financial sector.

4. Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people. Most poor people cannot get good financial services that meet their needs because there are not enough strong institutions that provide such services. Strong institutions need to charge enough to cover their costs. Cost recovery is not an end in itself. Rather, it is the only way to reach scale and impact beyond the limited levels that donors can fund. A financially sustainable institution can continue and expand its services over the long term. Achieving sustainability means lowering transaction costs, offering services that are more useful to the clients, and finding new ways to reach more of the unbanked poor.

5. Microfinance is about building permanent local financial institutions. Finance for the poor requires sound domestic financial institutions that provide services on a permanent basis. These institutions need to attract domestic savings, recycle those savings into loans, and provide other services. As local institutions and capital markets mature, there will be less dependence on funding from donors and governments, including government development banks.

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6. Microcredit is not always the answer. Microcredit is not the best tool for everyone or every situation. Destitute and hungry people with no income or means of repayment need other kinds of support before they can make good use of loans. In many cases, other tools will alleviate poverty better—for instance, small grants, employment and training programs, or infrastructure improvements. Where possible, such services should be coupled with building savings.

7. Interest rate ceilings hurt poor people by making it harder for them to get credit. It costs much more to make many small loans than a few large loans. Unless micro lenders can charge interest rates that are well above average bank loan rates, they cannot cover their costs. Their growth will be limited by the scarce and uncertain supply soft money from donors or governments. When governments regulate interest rates, they usually set them at levels so low that microcredit cannot cover its costs, so such regulation should be avoided. At the same time, a micro lender should not use high interest rates to make borrowers cover the cost of its own inefficiency.

8. The role of government is to enable financial services, not to provide them directly. National governments should set policies that stimulate financial services for poor people at the same time as protecting deposits. Governments need to maintain macroeconomic stability, avoid interest rate caps, and refrain from distorting markets with subsidized, high-default loan programs that cannot be sustained. They should also clamp down on corruption and improve the environment for micro-businesses, including access to markets and infrastructure. In special cases where other funds are unavailable, government funding may be warranted for sound and independent microfinance institutions.

9. Donor funds should complement private capital, not compete with it. Donors provide grants, loans, and equality for microfinance. Such support should be temporary. It should be used to build the capacity of microfinance providers; to develop supporting infrastructure like rating agencies, credit bureaus, and audit capacity; and to support experimentation. In some cases, serving sparse or difficult-to-reach populations can require longer-term donor support. Donors should try to integrate microfinance with the rest of the financial system. They should use experts with a track record of success when designing and implementing projects. They should set clear performance targets that must be met before funding is continued. Every project should have a realistic plan for reaching a point where the donor’s support is no longer needed.

10. The key bottleneck is the shortage of strong institutions and managers. Microfinance is a specialized field that combines banking with social goals. Skills and systems need to be built at all levels: managers and information systems of microfinance institutions, central banks that regulate microfinance, other government agencies, and donors. Public and private investments in microfinance should focus on building this capacity, not just moving money.

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11. Microfinance works best when it measures—and discloses—its performance. Accurate, standardized performance information is imperative, both financial information (e.g., interest rates, loan repayment, and cost recovery) and social information (e.g., number of clients reached and their poverty level). Donors, investors, banking supervisors, and customers need this information to judge their cost, risk, and return.

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ANNEX B: MICROFINANCE GLOSSARY OF TERMS

Microfinance Glossary of Terms, Accion International45

Active Clients:The number of clients with loans outstanding on any given date. An institution's official statistics on active clients are usually recorded as the number of clients with loans outstanding on the date its financial statements are filed.

Active Loan Portfolio:The total amount loaned out less the total amount of repaid loans; i.e., all money that is "on the street" or owed to the institution in the form of loans on the date the report is filed.

Assessment:Also called evaluation. Assessments include instrumental appraisals, rating exercises, and other activities that may determine how well an institution performs financially, operationally, and managerially.

Benchmarking:Peer group benchmarking puts performance measurements in context by comparing an institution (e.g., an MFI) with similar institutions based on a common factor, such as region, size or methodology. A benchmark can also refer to the standard against which all similar institutions are compared.

Bridge financing:Interim financing used to solidify a position until more permanent financing can be made. The ACCION Latin America Bridge Fund provides bridges from microfinance institutions to local capital markets.

CAMEL:A U.S. Federal Reserve-developed diagnostic tool that measures the Capital adequacy, Asset quality, Management, Earnings and Liquidity of financial institutions. ACCION adapted the CAMEL instrument to the microfinance industry as a quantitative and qualitative assessment of MFI financial performance.

Capital Adequacy:A quantitative and qualitative measure of an institution's level of equity versus the risk it incurs. This measurement shows a program's ability to absorb loan loss.

Capital markets:The market for trading long-term debt instruments (those that mature in more than one year).

Collateral:Asset pledged by a borrower to secure a loan, which can be repossessed in the case of default. In a microfinance context, collateral can vary from fixed assets (a car, a sewing machine) to cross-guarantees from peers.

45 http://www.accion.org/micro_glossary.asp

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Commercial/ Financial Viability:See Financial Self-SufficiencyCommercialization:In a microfinance context, commercialization refers to the move by MFIs to provide services on a financially self-sufficient basis and under prevailing commercial principle and regulations.

Credit Bureau:An agency that contains information on the credit history of consumers so that creditors can make decisions about granting of loans.

Credit Rating:Usually used to determine a bank or financial institution's credit risk, a credit rating is an evaluation of an individual's or company's ability to repay obligations or its likelihood of not defaulting; also see CAMEL.

Credit Scoring:Measures the risk associated with each credit applicant/ micro borrower. Credit scoring is an automated system that assigns points for various credit factors, providing lenders with the ability to grade prospective clients and to calculate the risk of extending credit. In a microfinance context, the credit scoring method is modified to take into account a micro entrepreneur's experience, character and capacity to repay. The final credit score is an overall measure of the creditworthiness of the credit applicant.

Credit Union: A nonprofit, cooperative financial institution owned and run by its members. Members pool their funds to make loans to one another. The volunteer board that runs each credit union is elected by the members. Most credit unions are organized to serve people in a particular community, group or groups of employees, or members of an organization or association.

Default:Failure to make timely payment of interest or principal on a loan, or to otherwise comply with the terms of a loan.

Development Finance:Term that encompasses all financial services provided to low-income clientele in less developed nations - including microloans, microsavings, microinsurance, etc.

Disbursement:The actual transfer of financial resources. The disbursement of a microloan reflects the transfer of the loan amount from the lending institution to the borrower.

External Audit:A formal, independent review of an institution's financial statements, records, transactions and operations. External audits are usually performed by professional accountants in order to

lx

The National Strategy for Microfinance

lend credibility to financial statements and management reports, to ensure accountability for donor funds, or to identify internal weaknesses in an organization. The external audit process is key to transparency.

Financial Intermediation:The process of accepting repayable funds (such as funds from deposits or other borrowing) and using these funds to make loans.

Financial Systems Approach:See Financial systems section/ "ACCION's approach".

Financial Self-Sufficiency (FSS):Total operating revenues divided by total administrative and financial expenses, adjusted for low-interest loans and inflation. In a microfinance context, an institution is financially self-sufficient when it has enough revenue to pay for all administrative costs, loan losses, potential losses and funds.

Fixed Assets: Long-lived property of a microentrepreneur or firm that is used in that business' production (i.e., a sewing machine is a fixed asset for a microentrepreneur who makes clothing). Fixed-asset lending is a type of microfinance product that disburses loans expressly for the purpose of purchasing these fixed assets, which aid in production volume and income.

Fixed-Asset Lending/ Loan:Microfinance product in which loans are disbursed expressly for the purpose of purchasing fixed assets, which aid in production volume and income.

Governance:Process by which a board of directors, through management, guides an institution in fulfilling its corporate mission and protects its assets.

Group Lending:Lending mechanism which allows a group of individuals - often called a solidarity group - to provide collateral or loan guarantee through a group repayment pledge. The incentive to repay the loan is based on peer pressure - if one group member defaults, the other group members make up the payment amount.

Housing Finance:A specialized loan product that allows households of both microentrepreneurs and wage-earners to finance home improvements or additions. Loans tend to be longer-term, and in larger amounts, than traditional microenterprise loans. In the case of microbusiness owners, home improvement loans can enhance at-home businesses.

Informal Sector/ Economy:A subset of the economy consisting of self-owned enterprises and the enterprises of informal employers, in both urban and rural areas. The businesses of the informal sector are not

lxi

The National Strategy for Microfinance

registered with any taxation or regulatory bodies. The main features of the informal sector are ease of entry, self-employment, small-scale production, labor-intensive work, lack of access to organized markets, and lack of access to traditional forms of credit.

License:Formal governmental permission to engage in financial-service delivery that will subject the license-holding institution to prudential regulation and supervision.

Loan Guarantee:See Collateral.

Loan Loss Rate:Total write-offs divided by active portfolio. The loan loss rate is an indicator to measure un-recovered loans.

Loan Loss Reserve:A provision set aside to cover potential losses. Microfinance organizations often establish a loan loss reserve equal to 2-5 percent of the value of their active portfolios.

Loan Products:Types of loans with particular sets of terms and conditions, and often for a particular use. Within the field of microfinance, loan products include fixed-asset lending, home improvement loans and solidarity group lending.

Microcredit:A part of the field of microfinance, microcredit is the provision of credit services to low-income entrepreneurs. Microcredit can also refer to the actual microloan.

Microenterprise:A small-scale business in the informal sector. Microenterprises often employ less than 5 people and can be based out of the home. Microenterprise is often the sole source of family income but can also act as a supplement to other forms of income. Examples of microenterprises include small retail kiosks, sewing workshops, carpentry shops and market stalls.

Micro-entrepreneur:Owner/ proprietor of a microenterprise.

Microfinance:Banking and/or financial services targeted to low-and-moderate income businesses or households, including the provision of credit. The clients are micro-entrepreneurs seeking to finance their businesses as well as the whole range of poor clients who also use financial services to manage emergencies, acquire household assets, improve their homes, smooth consumption, and fund

lxii

The National Strategy for Microfinance

social obligations. Microfinance services go beyond microcredit. They also include micro-savings, micro-insurance and transfer services.

Microfinance Institution (MFI):

A financial institution - can be a nonprofit organization, regulated financial institution or commercial bank - that provides microfinance products and services to low-income clients.

Micro-insurance:A developing field of microfinance that provides health insurance and other insurance products to microentrepreneurs and employees in the informal sector.

Micro-loan:A loan imparted by a microfinance institution to a microentrepreneur, to be used in the development of the borrower's small business. Microloans are used for working capital in the purchase of raw materials and goods for the microenterprise, as capital for construction, or in the purchase of fixed assets that aid in production, among other things.

Operational Self-Sufficiency (OSS):A measure of financial efficiency equal to total operating revenues divided by total administrative and financial expenses. If the resulting figure is greater than 100, the organization under evaluation is considered to be operationally self-sufficient. In microfinance, operationally sustainable institutions are able to cover administrative costs with client revenues.

Opportunity Costs:In the context of microfinance, opportunity costs include the time or anything "forgone" a borrower spends on applying and filling out the paperwork for a loan.

Performance Standards:Normative levels set for specific performance measurements, like portfolio quality or leverage. In the field of microfinance, there are several entities and projects attempting to set universal performance standards for MFIs.

Permit:Formal governmental permission to engage in non-depository microlending activity that will not subject the permit-holding institution to prudential regulation and supervision.

Portfolio at Risk:Measurement of the total outstanding balance of loans past due - not late payments or payments not yet due - divided by the active portfolio; a more rigorous manner of assessing portfolio quality than portfolio past due/ delinquent portfolio.

Portfolio Outstanding:See Active Portfolio.

lxiii

The National Strategy for Microfinance

Portfolio Past Due/ Delinquent Portfolio:Total amount of loan payments that are due but have not yet been paid divided by active portfolio.Prudential (Regulation or Supervision):Regulation or supervision is prudential when it governs the financial soundness of licensed intermediaries’ businesses, in order to prevent financial-system instability and losses to small, unsophisticated depositors.

Regulation and Supervision:The creation and enforcement of a set of rules and standards for financial institutions, including MFIs. These rules are usually set by a country's central bank or superintendents of banks, or by other banking agencies.

Remittance:1. Money sent by expatriate migrant worker to family in home country. 2. A payment in cash, check or electronic transfer.

Savings Mobilization:Programs intending to mobilize the capital of the poor and to provide savings accounts, as well as credit services, to microentrepreneurs and low-income households.

Securitization:The process of pooling a group of assets, such as loans or mortgages, and selling securities backed by these assets. Securitization is one way microfinance institutions can access capital markets, improve liquidity and lend more money, all while managing risk.

Self-regulation/ Supervision:Regulation or supervision by a body that is effectively controlled by the entities being regulated or supervised.

Small & Medium Scale Enterprises (SMEs):Enterprises employing 5 to 10 workers (small-scale) or between 10 and 50 workers (medium-scale).

Solidarity Group:See Group Lending.

Stepped Lending:The process by which borrowers who repay loans on time are eligible for increasingly larger loans. Stepped lending keeps initial risk at a minimum while allowing microentrepreneurs to grow their businesses and increase their incomes.

Subsidized Rates of Interest:Loan interest rates that are kept artificially low (below market rates) by the lending institution; often subsidized by donations.

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The National Strategy for Microfinance

Supervision:See Regulation and Supervision.

Sustainability:An organization's ability to cover costs. There are varying degrees of sustainability, ranging from not sustainable to financially sustainable (see Financial Self-Sufficiency and Operational Self-Sufficiency).

Transformation:In a microfinance context, transformation refers to the process by which a nonprofit community organization or an NGO becomes a regulated financial institution.

Transparency:The degree of a financial institution/ MFI's openness as determined by a sequence of financial information-gathering and testing. A transparent microfinance organization gathers and reports accurate financial information on its own, to be verified and analyzed by external parties. These external authorities ensure that the MFI's performance complies with appropriate industry standards.

Village banking:Lending methodology in which clients - typically women - form groups of approximately 10-30 individuals that are autonomously responsible for leadership, bylaws, bookkeeping, fund management and loan supervision. The group pools funds to use for business loans, savings, and mutual support, and members cross-guarantee individual loans.

Working Capital:Defined as the difference between current assets and current liabilities, excluding short-term debt.

Write-off:Charging an asset amount to expense or loss. A microfinance institution writes off loans not expecting to collect them, while continuing to attempt collection.

lxv

ANNEX C: PROPOSED ACTION PLAN AND PRIMARY RESPONSIBLE ENTITIES

Proposed Macro Level Action Plan

Develop a policy and regulatory environment conducive to an inclusive financial system.

Objective Action / ActivityResponsible Entities

Primary SecondaryPriority

Time Frame

1. Greater coordination among industry stakeholders

A. Sign on to the National Strategy developed under this project.

B. Establish a microfinance sub-committee affiliated to the DAG SME sub-group.

SFD

DAG

GoE H

H

S

S

2. Greater PPublic awareness of the importance of MFMF to poverty alleviation and economic growth

A. Commission the development of focused promotional packages tailored for different target audiences.

B. Launch a public awareness campaign.

C. Initiate a National Award Program for MFIs adopting Best Practices

MFIN

MFIN

SRO

SFD/ CBE/Donors / Private Sector

MoMCSFD

SFD / MFIN / Donors

H

H

H

S

S

M

3. Establishment of non-prudential, self-regulatory mechanism

A. Commission a study on the legal and procedural arrangements for setting up an SRO in Egypt, to include the required steps.

B. Set-up self-regulatory organization (SRO).

MFIN

MFIN

Donors / SFD

Donors/SFD CBE/

MFIs

H

H

S

S

4. A legal and regulatory framework that enhances outreach and reduces market barriers

A. Revise the Executive Regulations of the NGO law to recognize specialized credit NGOs.

B. Revise related legislation/ procedures/bi-laws to allow the use of alternative forms of collaterals

C. Revise the legislations to allow the MFIs (Banks and NGOs) to supply the credit bureau(s) with their clients’ financial information

D. Revise legislation to allow for the establishment of non-bank commercial MFIs, and the transformation of successful NGOs into commercial MFIs.

E. Revise relevant legislation, based on the findings of a full feasibility study, to allow the NPA to use collected savings for on lending.

MISA

SFD

SRO

SFD

NPA

NGO-MFI / MoJ

MoJ/CMA/ EISA/ CBE

/MISA

MISA/CBE

MoJ

MISA/CBE

MoJ

CBE / MoJ / MoCIT

H

H

H

M

M

S

M-L

S

M-L

M

Proposed Meso Level Action Plan

Develop a supportive infrastructure that provides MFIs with the required human, financial, capital and information resources to provide efficient and effective services.

Objective Action / ActivityResponsible Entities

Primary SecondaryPriority

Time Frame

1. Broad availability of market information

A. Undertake reliable market surveys, poverty maps and gender analyses.

B. Develop sustainable mechanisms to collect, update, maintain and disseminate information.

SFD

SFD

Donors

Donors / MFI

Network/ ESMA / CBE /

SANABEL

H

H

S

S

2. Broad availability of credit information for MFIs

A. Establish a private sector microfinance credit bureau.

SRO MISA / CBE / SFD /

MISA / MFIs

H S

3. Support the establishment of an MFI Network

A. Coordinate the establishment of a national microfinance network or forum that represents all MFIs.

SFDMFIs / Donors

H S

4. Institute the use of international rating agencies

A. Link rating results to MFI financing decisions.

APEX CBE / MISA /

SRO

H S

5. Efficient functioning of finance mechanisms for MFIs

A. Build the institutional capacity of APEX institutions to:

a. Assess MFI performance; and

b. Establish clear and unified financing criteria.

B. Revise/amend procedures to facilitate bank wholesaling to NGO-MFIs.

C. Strengthen/create commercial lender guarantee schemes.

D. Change current Capital Market Authority regulations to allow for the securitization/factoring of MFI loan portfolios.

E. Allow MFIs’ to access Venture Capital Funds

a. Establish MFI investment Fund

b. Revise/amend legislation

SFD

CBE / MISA

SFD

CMA

CMA

Donors

MoJ

MFIN or ESMA /

MFIs / CG Companies

MFIN / SFD / MoJ

MFIN/MoJ / MISA/CBE

H

H

H

M

M

S

S

M

M

M

6. A supportive business service environment for MFIs

A. Develop a roster of private sector capacity building / TA providers, auditors, IT solution providers and rating agencies.

B. Monitor private sector adherence to best practices in curricula development and quality control.

C. Promote linkages between private sector and international training service providers and technical hubs.

D. Provide gender equality sensitization Capacity Building Programs to MFI staff.

E. Launch a nation-wide professional certification program for loan officers.

F. Develop technical guides for audits.

G. Provide TA programs focused on managerial, technical and financial skills for NGOs transforming into commercial MFIs.

SFD

SRO

MFIN

PS

MFIN

SFD / SRO

PS

MFIN / Donors

SFD

Donors

SFD / Donors

Donors / SFD

Donors / CBE / MISA

SFD / MFIN/ Donors

H

H

H

H

H

H

M

S

S

S

S

S

S

M-L

Proposed Micro Level Action Plan

Promote a diverse range of sustainable MFIs offering financial services that cater to evolving market demand.

Objective Action Responsible Entities

Primary SecondaryPriority

Time Frame

1. Engage multipurpose banks in the MF sector

A. Establish a unit within EBI dedicated to:

1. Building bankers’ awareness of the commercial viability of microfinance; and

2. Providing comprehensive MF capacity building programs to banks.

EBI

EBI

CBE / EFB

PS

H

H

S

S

2. Encourage adherence to reporting standards and performance benchmarks

A. Standardize institutional and financial reporting.

B. Provide MFIs with Capacity Building Programs focused on reporting standards.

C. Set national microfinance benchmarks.

D. Institutionalize the SRO (recommended in Objective III.3) to promote and monitor the timeliness and quality of MFI reports.

SRO

PS

SRO

SFD

CBE / MISA / SFD

SFD / SRO

SFD / CBE / MISA

CBE/MISA/ CGAP/ MFIN

H

H

H

H

S

S

S

S

3. Increase IT capacity of MFIs

1. Develop a roster of best practice systems accessible to all MFIs.

2. Allocate part of donor funding to MFIs for identifying and securing cost effective IT solutions.

MFI Network

DAG MF Sub-

committee

MFIs / SFD

SFD/Donors/ MoIC

H

H

S

S

4. Support product development and diversification

A. Allocate part of donor funding/TA for MFIs to design and pilot new products

B. Focus Donor Capacity Building Programs on market research, gender sensitive product design and rollout and facilitating national and international linkages.

C. Establish an innovation fund within the MFI Network and/or the SFD to encourage new products and services that meet the diverse financial needs of poor households in general, and women, youth and start-ups in particular.

D. Revise procedures/ legislation inhibiting new services / products.

DAG MF Sub-

committee

DAG MF Sub-

committee

MFIN

SFD

MoIC /SFD/ Donors

SFD/Donors/ MFIs

SFD /Donors /

MFIs

SRO / MoJ

H

H

H

H

S

S

S

S-M

5. Stimulate the acceptance of alternative forms of collateral

A. Review different forms of alternative collateral.

SFD MFIs/Donors /MFIN

H M – L

6. Use the NPA to deliver MF financial services to increase outreach and access

A. Conduct a thorough feasibility study of the two different options proposed (retail vs. MFI partnership), the opportunities and challenges involved, and the capacity building needs and costs associated with the various options.

B. Sign an agreement between NPA and commercial banks whereby the banks avail funding for on-lending by NPA.

C. Train NPA employees (existing or newly hired) on microlending mechanisms.

D. Sign an agreement between NPA and MFIs whereby NPA offices are outlets for MFI service delivery.

Private Sector

NPA / Banks

Private Sector

NPA / MFIs

NPA / SFD / CBE/MISA/

MoCIT

MoCIT/ CBE

EBI

MoCIT / CBE / MISA

H

M

M

M

S

S

S

S

Primary Responsible Entities

I. THE SOCIAL FUND FOR DEVELOPMENT (SFD)

Level Objective Action / Activity PriorityTime

Frame

Secondary Responsible

Entities

MACRO

Greater coordination among industry stakeholders

Sign on the National Strategy developed under this project

H S GoE

A legal and regulatory framework that enhances outreach and reduces market barriers

Revise related legislation / procedures / bi-laws to allow the use of alternative forms of collaterals

Review legislation to allow for the establishment of non-bank commercial MFIs and the transformation of successful NGOs into commercial MFIs

H

H

M-L

S

MoJ/ CMA / EISA / CBE/

MISA

MoJMISA / CBE

MESO

Broad availability of market information

Undertake reliable market surveys, poverty maps, and gender analyses

Develop sustainable mechanisms to collect, update, maintain and disseminate information

H

H

S

S

Donors

Donors / MFIs

Network or ESMA /

CBE

Support for the establishment of an MFI Network

Coordinate the establishment of a national microfinance network or forum where all MFIs are represented

H S Donors / MFI

Network

Institute the use of international rating agencies

Link rating results to MFI financing decisions

H S CBE / MISA

Efficient functioning of financing mechanisms for MFIs

Build the institutional capacity of APEX institutions to:

1. Assess MFIs performance2. Establish clear and unified

financing criteria Strengthen /create guarantee schemes to reassure commercial lenders initially

H

H

S

M

Donors

MFIN or ESMA /

MFIs / CG Companies

A supportive business service environment for MFIs

Develop a roster of private sector capacity building / TA providers, auditors, IT solution providers, and Rating Agencies

Develop technical guides for audits

H

H

S

S

MFIN / Donors

Donors / CBE / MISA

MICRO

Encourage adherence to reporting standards and performance benchmarks

Institutionalize the SRO to promote and follow the timeliness and quality of MFIs reports

H S

CBE / MISA / CGAP /

MFIN

Support product development and diversification

Revise procedures and legislation inhibiting the introduction of new services / products

H S-M SRO / MoJ

Stimulate the use of alternative loan collaterals pledged to MFIs

Review the different forms of alternative collaterals

H M-LMFIs /

Donors / MFIN

II. THE EGYPTIAN BANKING INSTITUTE (EBI)

Level Objective Action / Activity PriorityTime

Frame

Secondary Responsible

Entities

MICROEngage multipurpose banks in the MF sector

Establish a unit within EBI dedicated to:

1. Building the awareness of bankers on the commercial viability of MF

2. Providing comprehensive MF capacity building programs to bankers

H

H

S

S

CBE / EFB

PS

III. THE DONORS ASSISTANCE GROUP (DAG)

Level Objective Action / Activity PriorityTime

Frame

Secondary Responsible

Entities

MACROGreater coordination among industry stakeholders

Establish a microfinance sub-committee affiliated to the DAG SME sub-group

H S

MICRO

Increase IT capacity of MFIs

Allocate part of donor funds to MFIs for identifying and securing cost effective IT solutions

H S SFD / Donors /

MoIC

Support product development and diversification

Allocate part of donor funding/TA for MFIs to design and pilot new products

Focus donor capacity building programs for MFIs on market research, gender sensitive product design and rollout, and facilitating linkages within and outside of the country

H

H

S

S

MoIC / SFD /

Donors

SFD / Donors /

MFIs

IV. GOVERNMENTAL ENTITIES

1. Capital Market Authority (CMA):

Level Objective Action / Activity PriorityTime

Frame

Secondary Responsible

Entities

MESOEfficient functioning of financing mechanisms for MFIs

Review current Capital Market Authority regulations to allow for the securitization / factoring of MFIs' loan portfolios

Allow MFIs’ access to Venture Capital Fund

1. Establish MFI investment Fund

2. Revise / Amend the legislations

M

M

M

M

MFIN / SFD / MoJ

MFINMoJ /

MISA CBE

2. Central Bank of Egypt (CBE):

Level Objective Action / Activity PriorityTime

Frame

Secondary Responsible

Entities

MESOEfficient functioning of financing mechanisms for MFIs

Revise/amend procedures to facilitate banks wholesaling to NGO-MFIs

H S MISA / MoJ

3. Ministry of Insurance and Social Affairs (MISA):

Level Objective Action / Activity PriorityTime

Frame

Secondary Responsible

Entities

MACRO

A legal and regulatory framework that enhances outreach and reduces market barriers

Revise the Executive regulations of the NGO law to recognize specialized credit NGOs

H S NGO-MFI / MoJ

MESOEfficient functioning of financing mechanisms for MFIs

Revise/amend procedures to facilitate banks wholesaling to NGO-MFIs

H S MoJ

4. National Postal Authority (NPA)

Level Objective Action / Activity PriorityTime

Frame

Secondary Responsible

Entities

MACRO

A legal and regulatory framework that enhances outreach and reduces market barriers

Revise relevant legislation to allow the NPA to use collected savings for on-lending, based on the findings of a full feasibility study

M M CBE / MoJ /

MoCIT

MICRO

Utilize the NPA as a delivery mechanism for MF services to increase outreach and access to financial services

Signature of an agreement between NPA and commercial banks whereby the banks avail funding for on-lending by NPA staff

Signature of an agreement between NPA and MFIs whereby NPA offices are used as outlets for MFI’s services delivery.

M

M

S

S

MoCIT / CBE

MoCIT / CBE / MISA

V. ORGANIZATIONS TO BE ESTABLISHED

1. Microfinance Network:

Level Objective Action / Activity PriorityTime

Frame

Secondary Responsible

Entities

MACRO

Establishment of non-prudential, self-regulatory mechanism

Commission a study on the legal and procedural arrangements for setting up an SRO in Egypt and the steps needed

Set up the self-regulatory organization (SRO)

H

H

S

S

Donors / SFD

Donors / MFI

Network

Greater public awareness of the importance of MF for poverty alleviation and economic growth

Commission the development of focused promotional packages tailored for different target audiences.

Launch a public awareness campaign

H

H

S

S

Donors / SFD / CBE /

Private Sector

MoMC / SFD

MESOA supportive business service environment for MFIs

Promote the establishment of linkages between private sector providers and international training service providers and technical hubs

Launch a nation wide professional certification program of loan officers

H

H

S

S

Donors

Donors / SFD

MICRO

Increase MFI IT Capacity

Develop a roster of available and tested systems accessible to all MFIs

H S MFIs / SFD

Support product development and diversification

Establish an innovation fund within the MFI Network and/or the SFD to encourage development of new products and services that meet the diverse financial needs of poor households, in particular women, youth, start-ups, etc.

H SSFD/Donors

/MFIs

2. Self-Regulatory Organization (SRO):

Level Objective Action / Activity PriorityTime

Frame

Secondary Responsible

Entities

MACRO

Greater PPublic awareness of the importance of MFMF to poverty alleviation and economic growth

Initiate a National Award Program for MFIs adopting Best Practices

H M MFIN

MESO

Broad availability of credit information to MFIs

Establish a microfinance private sector credit bureau

H S

MISA / CBE / SFD / MISA / MFIs

A supportive business service environment for MFIs

Monitor private sector adherence to best practices in curricula development and quality control

Develop technical guides for audits

H

H

S

S

SFD

Donors / CBE / MISA

MICROEncourage adherence to reporting standards and performance benchmarks

Standardize institutional and financial reporting

Set national microfinance benchmarks

H

H

S

S

CBE / MISA / SFD

SFD / CBE / MISA

VI. THE PRIVATE SECTOR

Level Objective Action / Activity PriorityTime

Frame

Secondary Responsible

Entities

MESOA supportive business service environment for MFIs

Provide capacity building programs to MFI staff, focusing on Gender Equality Sensitization

Provide TA programs focused on managerial, technical and financial skills for NGOs that decide to transform into commercial MFIs

H

M

S

M-L

SFD / Donors

SFD / MFIN / Donors

MICRO

Encourage adherence to reporting standards and performance benchmarks

Provide MFIs with capacity building programs focused on reporting standards

H S SFD / SRO

Utilize the NPA as a delivery mechanism for MF services to increase outreach and access to financial services

Conduct a thorough feasibility study of the two different options proposed (retail vs. MFI partnership), the opportunities and challenges involved and the capacity building needs and costs associated with the various options

Train NPA employees (existing or newly hired) on microlending mechanisms

M

M

S

S

NPA / SFD / CBE / MISA

/ MoCIT

EBI

REFERENCES

Sam Daley-Harris, “State of the Microcredit Summit Campaign Report 2004.” Microcredit Summit Campaign, (Washington, D.C. 2004) http://www.microcreditsummit.org/pubs/reports/socr/2004/SOCR04.pdf

UNDP. “Unleashing Entrepreneurship: Making Business Work for the Poor.” United Nations Commission on the Private Sector and Development. (New York: United Nations, 2004). http://www.undp.org/cpsd/documents/report/english/fullreport.pdf

Elizabeth Littlefield and Richard Rosenberg. “Breaking Down the Walls between Microfinance and the Formal Financial System.” (Washington, D.C.: CGAP, 2004) Available at http://www.cgap.org/docs/BreakingDownWalls.pdf.

CGAP staff. “Microfinance Means Financial Services for the Poor.” Donor Brief No. 11. Washington, D.C.: CGAP 2003. http://www.cgap.org/docs/DonorBrief_11.pdf

United Nations. International Year of Microcredit 2005. http://www.yearofmicrocredit.org July 2005.

Robinson, Marguerite S. Mobilizing Savings from the Public Basic Principles and Practices. 2004. Kampala, Uganda: SPEED-USAID

Joanna Ledgerwood Microfinance Handbook. An Institutional and Financial Perspective.Sustainable Banking with the Poor series. (Washington, D.C.: World Bank, 1999)

Profile of M/SMEs in Egypt Update Report, draft submitted to the Small & Medium Enterprise Policies Project (SMEPol), 2005

Mahmoud El Gammal, et al, Beyond Credit: A Taxonomy of SMEs and Financing Methods for Arab Countries, The Egyptian Center for Economic Studies – Working Paper Series No. 57, May 2001

Alia El-Mahdi. “GPN Global Labor Market Database: Egypt.” Posted to GPN on 10 October 2003. Global Policy Network. http://www.globalpolicynetwork.org/ July 2005

Mona Amer et al., The Egyptian Labor Market in an Era of Reform (Cairo: An Economic Research Forum Edition, The American University in Cairo Press: 2002). From: EQI. “Profile of M/SME in Egypt, Update Report.” Submitted to Small and Medium Policies, SMEPoL. June 2005.

UNCDF Microfinance Sector Development Approach: March/April 2003 http://www.uncdf.org/english/countries/egypt/microfinance/UNCDF_Egypt_MF-Country%20Assessment.pdf. August 2005

“Increasing M/SME Accessibility to Finance: Credit and Credit Guarantees in Egypt”, Egyptian Ministry of Finance, 2005.

“Community Development Finance Institutions”, UK Social Investment Forum, www.uksif.org/z/z/z/sgei/cdf/cdfis.shtml, July 2005 and “What are CDFIs?” the Coalition of Community Development Financial Institutions, www.cdfi.org July 2005http://www.accion.org/micro_glossary.asp August 2005