Access to Finance
and Economic Growth
in Egypt
Access to Finance and Economic Growth in Egypt
Middle East and North African Region
A Study Led By SAHAR NASR
A Study Led By S AH AR NA SR
T
his publication provides a comprehensive and informative analysis of a key policy issue facing Egypt
and other developing countries-how to enhance appropriate access to finance in support of sustained
high economic growth and improved income distribution. The detailed and elegant evaluations of the
key segments of the financial sector are supplemented by a holistic discussion that draws out the main
interactions, including the linkages to institutional reforms. The timely publication will be interest to a
large number of policy makers, academics, development practitioners and financial market participants.”
Dr. Mohamed A. El-Erian, President and CEO of the Harvard Management Company, member of
the faculty of the Harvard Business School, and Deputy Treasurer of Harvard University
B
roadening the reach of the financial sector is the key to invigorating both economy and society. If
more small businesses can get access to the credit and other financial services they need to turn
initiative into employment and profitability, and if low income households can gain the economic security
offered by an account at an intermediary, economic growth and social welfare will both be enhanced.
This report takes a close look at the Egyptian financial system to see how outreach and access can be
improved. It is firmly based on recently collected statistics and it provides a comprehensive analysis with
recommendations. Recent government initiatives have already begun to transform the Egyptian financial
system. Access to Finance and Growth in Egypt points the way to future success in lifting the system to
the next level.”
Dr. Patrick Honohan, Senior Advisor, World Bank; and Professor of International Financial
Economics and Development, Trinity College Dublin
F
inancial exclusion is likely to act as a “brake” on development as it retards economic growth and
increases poverty and inequality. However, the access dimension of financial development has

and Economic Growth
in Egypt
Access to Finance and Economic Growth in Egyptii
Introduction iii
Access to Finance
and Economic Growth
in Egypt
Middle East and North African Region
A Study Led By SAHAR NASR
Access to Finance and Economic Growth in Egyptiv
Introduction v
Abbreviations and Acronyms viii
Foreword ix
Preface xi
Acknowledgments xiii
Executive Summary xvii
I. Introduction 1
II. Sources for Financial Services: The Banking Sector 23
A. Access to Bank Financial Services 23
B. Factors behind Weaknesses in Supply of Banking Services 28
C. Access to Microfinancial Services 45
III. Sources for Financial Services: Non-bank Financial Services 55
A. Capital Markets 55
B. Insurance and Contractual Savings 61
C. Mortgage Finance 68
D. Financial Leasing 73
E. Factoring 76
IV. Institutional Environment 81
A. Legal Framework 81
B. Information Infrastructure–Credit Registry, Credit Bureau and Other Sources 86

Table 2.4: Number of Credit and Debit Cards Issued in Egypt during 2005 28
Table 2.5: Branching and ATM Presence, Cross-Country Comparisons 30
Table 2.6: Earnings per Employee of Banks in Egypt 37
Table 2.7: Expense Ratio of Banks in Egypt 37
Table 2.8: Main Reasons for not Lending to SMEs in Egypt 40
Table 2.9: Lending Rates for Local Currency of Banks Operating in Egypt 41
Table 3.1: Compound Annual Growth Rate by Sub-Sector in Egypt 62
Table 3.2: Statutory Investment Limits—Life Insurers in Egypt 63
Table 3.3: Assets and Investments in Egypt 63
Table 3.4: Insurance Investment Allocation in Egypt 65
Table 3.5: Private Pension Investment Allocation in Egypt 66
Table 3.6: Investment Approach of the Contractual Savings Industry 66
Table 4.1: History of Public Credit Registry Database in Egypt 86
Table 4.2: Negative Databases of CBE Credit Registry 87
Figures
Figure 1.1: Current versus Desirable Situation of Financial System 2
Figure 1.2: M2-to-GDP in Selected Countries across the World 8
Figure 1.3: Private Sector Credit-to-GDP in Selected Emerging Economies 9
Figure 1.4: Investment Climate Constraints in Egypt as Perceived by Businesses 15
Figure 1.5: Percentage of Firms Currently with a Loan from
a Financial Institution in Egypt 16
Figure 1.6: Enterprises’ Access to Finance in Egypt and Selected MENA Countries 16
Figure 1.7: Households’ Share in Access to Financial Services by
Educational Attainment in Egypt 18
Figure 2.1: Loans-to-Deposits Ratio in Egypt 24
Figure 2.2: Loan-to-Deposit Ratio in Egypt 24
Figure 2.3: Treasury Bills-to-Total Assets in Egypt 24
Figure 2.4: Government Sector Loans-to-Total Loans in Egypt 25
Figure 2.5: State-Owned Enterprises Loans-to-Total Loans in Egypt 25
Figure 2.6: Credit Extended to Private Sector in Egypt 26

Box 2.4: Weaknesses in Corporate Governance in Egyptian State-Owned Banks 42
Box 2.5:
The Relative Importance of Demand and Supply Factors in Explaining Access
43
Box 2.6: State-Owned Banks Actively Involved in Microfinance in Egypt 46
Box 2.7: NGOs are Key Players in Microfinance in Egypt 47
Box 3.1: Major Insurance and Pensions Investors in Egypt 67
Box 3.2: The Government of Egypt’s Housing Finance Program for the Poor 69
Box 3.3: The Egyptian Mortgage Refinance Company 70
Box 4.1: Current Status of the Private Credit Bureau in Egypt 88
Box 4.2: The Importance of Good Financial Reporting for Firm Financing 89
Box 5.1: Lessons on Bank Restructuring from Other Countries 96
Box 5.2: Subsidized Lending Schemes in Egypt 100
Box 5.3: Lessons from Successful Postal Financial Systems:
Case Studies from Brazil and China 102
Box 5.4: International Evidence on Institutional Policies to Enhance Access 104
Contents
Access to Finance and Economic Growth in Egyptviii
ABBREVIATIONS AND ACRONYMS
ABS Asset-Backed Securities
AIM Alternative Investment Market
ALM Asset and Liability Management
AML/CTF Anti Money Laundering
and Combating Terrorism Financing
ATM Automatic Teller Machines
AUM Assets Under Management
BRU Bank Restructuring Unit
CAGR Compound Annual Growth Rate
CAPMAS Central Agency for Public Mobilization
and Statistics

GEM Gender Entrepreneurship Markets
GSF Guarantee and Subsidy Fund
HH Household
IAS International Accounting Standards
ICA Investment Climate Assessment
ICS Investment Climate Survey
ICT Information and Communications
Technologies
IFG International Factoring Group
IFRS International Financial Reporting Standards
IFI Islamic Financial Institutions
IFS Islamic Financial Services
IIC Islamic Investment Companies
IPOs Initial Public Offerings
KOSDAQ Korea Securities Dealers Automated
Quotation
LE Egyptian Pound
M2 Broad Money
MCSD Misr Clearing, Settlement and Central
Depository Company
MENA Middle East and North Africa
MFA Mortgage Finance Authority
MFIs Microfinance Institutions
MIB Misr International Bank
MIX Microfinance Information Exchange
MTPL Mandatory Insurance
NBFI Non-bank Financial institutions
NBD National Bank for Development
NBE National Bank of Egypt
NGO Non-governmental organization

Introduction ixContents
This report was initiated at the request of the Egyptian Government
to get a better understanding of why, as found by the Investment
Climate Assessment, only 17.4 percent of Egyptian firms operate in
the formal credit market. The report draws on surveys of firms, banks
and households to determine why so few firms—and households—use
formal financial markets for their investment and saving needs, and
why banks and other financial institutions are reluctant to extend
credit, even in conditions of high liquidity.
The key findings are that: (i) significant public ownership of real
and financial assets in Egypt has discouraged competition and the
development of deep and well-regulated financial systems, including
non-bank sources of financial services; (ii) a large fiscal deficit has
encouraged financial institutions, particularly publicly owned ones,
to invest predominantly in risk and tax free government securities;
banks, and publicly owned ones in particular, have little incentive
to lend to other than state-owned enterprises and large private
firms; and (iii) smaller private and foreign banks are more active in
expanding access to financial services by households and small and
medium enterprises (SMEs) due to their capacity to better assess risk
and capture opportunities.
Improving access to financial services will require continuing the
shift in the role of the government in the sector—away from asset
ownership and towards creating an enabling environment for private
(including foreign) financial service providers to innovate in providing
services to firms and households. Here, as the report indicates,
the government has a critical role to play in ensuring a stable
macroeconomic environment, lower deficit and public borrowing, good
supervisory oversight, and adequate institutional infrastructure. A
number of the issues raised in this report are already being addressed

Access to Finance and Economic Growth in Egyptx
Introduction xi
In September 2004, the Financial Sector Reform Program was launched
and endorsed by the Government of Egypt at the highest political level. The
five pillars of the program are reforming the banking sector, restructuring
the insurance sector, deepening the capital markets, developing a well-
functioning mortgage market, and activating other non-bank financial
institutions and services. The program aims at improving the soundness
of the financial sector and promoting an enabling environment for an
efficient, competitive and agile financial system that serves Egypt’s
development and growth objectives.
The Egyptian government and the Central Bank of Egypt have been
keen on the effective implementation of this program, and significant
progress has already been made. Important achievements include, the turn
around of the structure of the banking sector and the foreign exchange
market as well as establishing a credible monetary policy framework,
in addition to consolidating the banking sector, divestiture of the state-
owned banks’ shares in the joint-venture banks, privatizing one of the
four largest public banks, pursuing the restructuring of the remaining
public financial intermediaries and building the supervisory capacity of
the Central Bank.
Meanwhile, major reforms aiming at improving the regulatory framework
and enhancing the soundness and effectiveness in financial intermediation
of non-bank financial services, have been undertaken. These reforms have
contributed to the deepening of the capital market and enhancing its efficiency
and liquidity, restructuring and liberalizing the insurance sector, developing
the mortgage market, and reviving the role of other non-bank financial
services and instruments, including leasing, factoring and securitization. This
comprehensive reform program has been underpinned by capacity building of
the supervisory authorities of all non-bank financial institutions

Dr. Farouk El-Okda, Governor of the Central Bank of Egypt (CBE).
This study was carried out under the joint leadership of Emmanuel
Mbi, Country Director, and Zoubida Allaoua, Sector Manager in the
Middle East and North Africa Region (MENA) of the World Bank.
The study was led by Sahar Nasr, Senior Financial Economist in
MENA, based on input from Stijn Claessens, Senior Adviser; Rodney
Lester, Program Director, Financial Markets for Social Safety Net;
David Scott, Adviser; Loïc Chiquier, Head, Housing Finance Practice;
JaeHoon Yoo, Senior Securities Market Specialist; Robert J. Cull,
Senior Economist; Luc Laeven, Senior Financial Economist from
the Finance and Private Sector Development Vice Presidency; and
Mohamed Yehia Abd El Karim, Financial Management Specialist; as
well as Heba El Laithy, Senior Consultant; Bahaa Ali Eldin, Senior
Legal Consultant; and Esen Ulgenerek, Consultant.
This access to finance study is based on the findings of five main
surveys: the Investment Climate Survey (ICS) of 1,052 enterprises
from the manufacturing sector that was carried out between
October 7 and December 10, 2004 using the World Bank standard
methodology; the ICS recall questionnaire of 300 enterprises that was
carried out in June 2005; the individual banks survey undertaken
between February and March 2006, supported by CBE, based on the
core questionnaire provided by Asli Demirguc-Kunt, Senior Research
Manager at the World Bank, to which 35 out of 45 banks operating
in Egypt responded; the insurance survey, carried out under the
leadership of the Ministry of Investment in March 2006 and to
which 20 out of 21 insurance companies responded; and the National
Household and Income Survey for the fiscal year 2005, which covered
48,000 households in 1,500 communities. The first three surveys were
carried out by the Social Research Center (SRC) of the American
University in Cairo, under the leadership of Dr. Hoda Rashad, and

community in a roundtable organized by the American Chamber
of Commerce in Egypt coordinated by Hisham Fahmy, Executive
Director. Partners who are actively involved in the financial sector
in Egypt, including USAID, European Commission (EU), and United
Nations Development Program (UNDP), have made significant
contribution to this study.
Thoughtful comments from several World Bank colleagues and
external reviewers are reflected in this study. The study benefited
immensely from intensive reviews by Patrick Honohan, Senior Adviser;
in addition to external reviewers Mohamed El Erian, President and
CEO of Harvard Management Company; and Nasser Saidi, Director
of Hawkamah Institute for Corporate Governance. Comments and
contributions from several World Bank colleagues on an earlier draft
have also been provided by Noritaka Akamatsu, Roberto Rocha and
Ahmed Galal. The study also benefited from comments received from
Gaiv Tata, S. Ramachandran, and Omer Karasapan. Valuable support
was received from Marilou Jane D. Uy. World Bank, International
Finance Corporation (IFC) and FIRST Initiative staff contributed to
this study, including notably Bikki Randhawa; Carmen Niethammer;
Isabella Segni; Jim Aziz, Jose Antonio Garcia Luna; Massimo
Acknowledgments
Introduction xv
Cirasino; Murat Sultanov; Peer Stein; Peter Sheerin; Robert Keppler;
and Thomas Jacobs. Laila Abdel Kader provided extensive support
with document preparation. Amira Fouad Zaky, Steve W. Wan Yan
Lun, and Sydnella E. Kpundeh provided invaluable logistical support
throughout the process. Editorial support was provided by Laura
Goodin and print production including book design was undertaken
by Magdy Nassif.
Early versions of this study have been presented and discussed at

economies.
A well developed financial market comprise spectrum of well-
functioning banks, and non-bank financial institutions. Banks
provide deposit and payments services, allocate resources, and
monitor operations of firms. Equity markets provide financial
leverage and ensure efficient allocation of resources. Well-developed
capital markets force banks to pay more attention to smaller firms
and households. Active domestic bond markets provide firms with
long-term domestic currency finance and ease credit crunch during
periods of bank stress. Housing finance is important for households
and provides an important asset for entrepreneurs. Successful
leasing, factoring, and venture-capital markets provide financing and
enhance an economy’s productivity.
The potential for financial development and growth in Egypt is
large as macro economic policies and overall business environment
fundamentals are increasingly supportive. This is evident in
accelerating economic growth, increased market confidence, strong
capital inflows, stability in the foreign exchange market, significant
increase in international reserves, and fall in inflation. The impact
Executive Summary
Greater financial
development increases
growth, reduces
economic volatility
and improves income
distribution
The potential for
financial development
in Egypt is large
as macro economic

further deepen the capital market, restructure the insurance sector,
develop a well-functioning mortgage market, activate financialleasing,
and factoring. However, such progress has not yet been reflected in
improved performance and enhanced financial intermediation.
Various financial indicators put the Egyptian financial sector
at a moderate level in financial intermediation compared to other
developing countries. Although mobilization of savings in Egypt is high
by international standards, the banking sector is not intermediating
efficiently. Most savings are channeled through the financial system as
bank deposits, where the deposit-to-GDP ratio of 100 percent is much
higher than the world average and substantially higher than many
developed economies. However, little of it is channeled to the real,
productive private sector and is mainly used to finance government
deficits or as loans extended to state-owned enterprises.
Private-sector credit to GDP in Egypt is modest compared to other
developing economies. Private credit as a share of total credit has
been declining, to reach 66 percent in 2006, compared to 70 percent
in 2003. Importantly, the distribution of bank financing is uneven,
with most loans going to large and well-established enterprises.
Consequently, family-owned firms and small and medium enterprises
(SMEs)—the majority of firms in Egypt—rely heavily on the informal
market.
Formal financing, whether from banks or non-bank financial
institutions, plays a limited role in financing enterprises, especially
This is largely due
to the broad range of
structural reforms
initiated by the
government since
mid-2004, of which

and working capital in Egypt is financed externally through the
banking sector, compared to more than 13 percent in MENA region,
and 18 percent in the rest of the world. Banks often prefer to extend
credit to large corporate clients and connected individuals that are
considered less risky, while start-up companies remain financially
constrained. While the capital market can play an important role
in financing growth and development, it only financed 3.8 percent
of new investments in Egypt. The dependence on internal finance
indicates that firms in Egypt are unable to take advantage of growth
opportunities, with negative ramifications for overall economic and
employment growth.
Incentives for small firms and households to use deposits and
other financial services are poor. Minimum required deposit amounts
are too high to enable the poorer segments of the population to access
the banking system and tend to discourage the unbanked population
to save through formal channels. The lack of deposit mobilization
from small savers is not due to financial repression, as interest rates
on deposits are relatively high. Although state-owned banks have
a comparative advantage in attracting small depositors, with their
huge branch network in governorates and villages, they have instead
focused on large depositors, and extend very limited financial services
to the relatively disadvantaged segments of society. Recently, however,
banks have been trying to catch up and cater to small depositors for
all types of financial services.
Few Egyptian households use any kind of formal financial services.
Savings instruments are more common than credit, and the most
common is postal savings, roughly twice as prevalent as bank savings
among the illiterate and those who can read and write. Usage of
financial services increases substantially with the level of education
of the head of the household. However, almost no households have

Executive Summaryxx
large deposits, amounting to about 100 percent of GDP, they actually
lend little of these deposits. The loan-to-deposits ratio has been
declining over the last few years to reach only 58 percent in June
2006, well below the world average of 86 percent, and much less
than the level of intermediation in many developed economies, where
typically credit exceeds deposits.
Only a small portion of the funds that are mobilized are lent to the
productive sector, and even less to the private sector. Credit to the
private sector was at 54 percent of GDP in 2006, similar to country
comparators, yet half the OECD average. Credit to the private sector
has sharply decreased over the past few years, as private credit as a
share of total credit has been declining to reach 66 percent in 2006,
compared to 70 percent in 2003. Furthermore, much of the lending
extended to the private sector goes to a few large firms, with most
firms, especially SMEs, receiving little financing.
Most of the funds that are mobilized finance thebudgetdeficitand the
public sector. Banks, particularly state-owned banks, are increasingly
investing in treasury bills and government bonds, holding about 91
percent and 70 percent of the outstanding respectively as of June 2006.
This reflects banks’ inefficiency in identifying profitable projects, as
well as their cautious investment policies. Investing in treasury bills,
in addition to being risk-free, is tax-exempted. Direct lending to the
public sector–both the government and state-owned enterprises
(SOEs)–has also increased in recent years. Lending to SOEs remains
high for state-owned banks compared to private banks.
Access to Bank Financial Services
Relative to Egypt’s total population, banks have few outlets for basic
banking services. Egypt has fewer bank branches and automatic teller
machines (ATMs) per capita than countries with similar per-capita

SMEs receiving little
financing
Banks, especially
state owned ones,
increasingly invest
in treasury bills and
government bonds
Relative to Egypt’s total
population, banks have
few outlets for basic
banking services
Executive Summary xxi
Factors Behind Weaknesses in Supply of Banking Services
The poor quality of financial intermediation is reflected in high
transaction costs, large non-performing loans, and limited access for
small firms and households to financial services. This could be partially
attributed to the dominance of state-owned banks, compounded by
the ongoing process of institutional and operational restructuring, as
well as the new and relatively untested regulatory and supervisory
framework.
The banking sector is dominated by state-owned banks that lag in
efficiency and generally in performance in financial intermediation
compared to their private counterparts. State-owned banks are
undercapitalized, and suffer from poor asset quality and high levels of
non-performing loans. There are no incentives for them to proactively
identify problem loans, maximize profits, or even minimize losses, as
reflected in their relatively low profit margins, high operating costs,
and inadequate risk-management systems.
Importantly for access to financial services, state-owned banks
are also slow to modernize and innovate, and the volume and scope

lack of competition, and overall inefficiency.
State-owned banks,
that dominate the
banking system,
lag in efficiency
and in financial
intermediation
compared to their
private counterparts
they are also slow
to modernize and
innovate, and the
volume and scope of
products and services
they offer have been
limited
Lending terms are
unfavorable with
very high collateral
requirements, and slow
response times to set up
credit lines
Skills to assess credit
risk are generally
weak, and the credit
decision is centralized
Executive Summaryxxii
While interest rates follow the government borrowing costs as a
benchmark, there is no proper yield curve to help price risks in the
longer market. The lack of foreign-currency hedging instruments

earmarked for its implementation.
The ongoing consolidation of the banking system with the exit of
small private and joint-venture banks and the entry of several strong
foreign banks is expected to enhance competition in the market. Such
rapid consolidation will lead to opportunities to exploit economies of
scale, lowering the cost of financial intermediation. The privatization
of Bank of Alexandria—the fourth largest state-owned bank—in late
2006 is considered a milestone in this comprehensive reform program.
The progress in the implementation of the banking reform program
has been evident in the slight improvements in the banking system
performance and capacity to intermediate indicators.
and there is not a
proper yield curve to
help price risks in the
longer market
However, state-
owned banks have
recently been subject
to institutional
and operational
restructuring
and there has been
slight improvements
in banking system
performance
and capacity to
intermediate
Executive Summary xxiii
Sources For Financial Services:
Non-bank Financial Services

and limited transparency, SMEs have more difficulties in accessing
capital markets.
The securities market as a source of investment financing is limited
in Egypt. The private sector has made few corporate bond and public
equity offerings in recent years. While there have been more equity
issues than corporate bonds, many equity issues were public offerings
or sales of government shares in large state-owned companies, which
do not add to capital formation. Funds raised through corporate bonds
were even less compared to equity financing. The corporate bond
market is nascent and largely dominated by commercial banks, while
access to international capital markets is limited to large enterprises
and financial firms. No Eurobond has been issued by an Egyptian
company to date.
Non-bank financial
institutions are under
developed, and face
various obstacles
similar to those
impeding effective
intermediation by the
banking system
The developments of
capital markets in
Egypt remains below
potential especially
in terms of primary
markets
The corporate bond
market is nascent and
largely dominated by

tends to be based on price rather than product innovation. Importantly
for access to financial services,anddespitecurrentregulationsallowing
insurance companies a limited degree of investment flexibility,
most reserves continue to be invested in government bonds or bank
deposits. This underlines the need to develop a modern corporate-
finance culture with up-to-date institutional investment skills. At the
same time, capital markets lack products suited to the insurance and
contractual savings markets’ liability structures.
Dominated by state-ownership, the insurance sector’s investment
portfolios have been used for social purposes, to fund state-owned
banks and state-owned enterprises and to meet government borrowing
requirements. Investment in the real sector has been relatively
insignificant. The insurance sector suffers from a lack of investment
skills, including lack of asset and liability management modeling
capacity and limited ability to assess credit and market risks. This is
exacerbated by a legal and social environment that discourages risk
taking and, in the state-owned insurers, a salary structure that makes
it impossible to attract top graduates. The regulatory environment
also places relatively tight limits on investment allocations, prudent
in the absence of a risk-based supervisory regime and capacity, but
limiting access to finance for the real sector.
Investment decisions by private pension funds—an essential
component of the contractual savings scheme—show even lower
intermediation to the real and private sectors than in the insurance
sector. Private pension funds tend to be managed in-house, encouraging
Egypt’s insurance and
contractual savings
sector is small compared
to the size of its economy
Institutional savings—