As intended by the Microfinance Law of 2014, which enables for-profit non-bank microfinance institutions (MFIs) to enter the market, the microfinance sector is quickly becoming commercialized. After decades of being offered only by non-profit NGOs and banks as a development instrument to support micro-businesses, in just a few years, for-profit companies are now controlling more than half of the microfinance market. From the launch of Egypt&rsquo;s first microfinance program in 1988 until 2009, the sector grew at a very modest rate, reaching only 1.5 million borrowers in 2009 (see Table 1 below).<a href="#_ref1">[i]</a> However, the number of borrowers has more than doubled by 2020, reaching 3.2 million borrowers served mainly by 11 companies (accounting for 40% of borrowers) and 17 big NGOs (52% of borrowers). The total amount of microfinance loans in 2020 was EGP19.4 billion, with for-profit companies holding 54% and big NGOs holding 39% (Financial Regulatory Authority [FRA], 2017, 2021). But what makes microfinance attractive to the private sector? Does microfinance really help microbusinesses? And how can finance support social and economic development?
Table 1: Overview on Microfinance in Egypt
<table style="border-collapse: collapse; border-color: black; border-style: solid;" border="2">
<tbody>
<tr>
<td>
&nbsp;
</td>
<td>
2009
</td>
<td>
2016
</td>
<td>
2020
</td>
</tr>
<tr>
<td>
No. of borrowers (mln)
</td>
<td>
1.5
</td>
<td>
1.8
</td>
<td>
3.2
</td>
</tr>
<tr>
<td>
Amount of outstanding loans (EGP bn)
</td>
<td>
2.2
</td>
<td>
4.5
</td>
<td>
19.4
</td>
</tr>
<tr>
<td>
No. of companies
</td>
<td>
0
</td>
<td>
3
</td>
<td>
11
</td>
</tr>
<tr>
<td>
No. of big NGOs<a href="#_edn2">[ii]</a>&nbsp;
</td>
<td>
13
</td>
<td>
13
</td>
<td>
17
</td>
</tr>
<tr>
<td>
No. of small NGOs
</td>
<td>
387
</td>
<td>
739
</td>
<td>
922
</td>
</tr>
<tr>
<td>
Percentage of women in total borrowers
</td>
<td>
50%
</td>
<td>
69%
</td>
<td>
62%
</td>
</tr>
<tr>
<td>
Share of amount of loans to women
</td>
<td>
&nbsp;
</td>
<td>
51%
</td>
<td>
46%
</td>
</tr>
<tr>
<td>
Interest rate (fixed rate)
</td>
<td colspan="3">
From 16% (individual) to 28% (group lending)
</td>
</tr>
<tr>
<td>
Effective interest rate
</td>
<td colspan="3">
From 33% (individual) to 59% (group lending)
</td>
</tr>
</tbody>
</table>
Source: Data from Financial Supervisory Authority (FSA) (2010) reported in Khafagy (2013), and FRA (2017, 2021)
<h3>Commercialization of microfinance</h3>
Microfinance is attracting private sector investors simply because it is a profitable industry. In Egypt, as in elsewhere, the commercialization of microfinance is not surprising, as the idea is rooted in a neoliberal thinking of market-oriented development that ignores the role of the state and other institutional factors of underdevelopment. The current dominant microfinance model started in Bangladesh in the early 1980s by Mohamed Yunus. The idea is based on a simplistic view that the mere availability of microloans, at any cost, will help low-income people to establish microbusinesses that will generate enough income to carry them out of poverty. This model was quickly celebrated and promoted by international agencies, like the World Bank Group and United States Agency for International Development (USAID) (Khafagy, 2019).&nbsp;
Supporters of commercial microfinance argue that the significantly high interest rates are necessary because small and micro loans are riskier than large corporate loans. This claim is not entirely correct as the level of risk cannot justify the significant difference between lending rates of large and micro loans. First, microfinance is generally granted through loan officers who know the geographic area of the borrowers and may even have a social relationship with microbusinesses. Second, the collection of microloans relies heavily on peer pressure, that is the pressure imposed by other borrowers to maintain timely repayments to sustain the services in the area or for maintaining the good reputation of the community. Third, while large corporations obtain loans based on their ability to secure the necessary collaterals, microfinance is obtained after signing a legal receipt of trust or paying additional fees for credit guarantee schemes (or both).<a href="#_edn3">[iii]</a> These mechanisms are highly effective in securing the repayment of the loans. In fact, the repayment rate of microfinance remained noticeably high even during the many economic downturn witnessed in Egypt during the last decade. In the banking sector for instance, the ratio of non-performing loans for micro, small, and medium enterprises was only 0.8% by June 2020 (Central Bank of Egypt [CBE], 2020)
High interest rates are driven by different reasons then. First, since non-bank MFIs &ndash; NGOs and private companies &ndash; cannot mobilize deposits, they rely mainly on external loans and grants that are then channelled to microloans. There is, however, a high and fluctuating cost for obtaining these external funds, so MFIs aim to accumulate enough capital through higher profits that can be used to provide future loans without the need for further external funds. Even before the entrance of for-profit MFIs, the return on equity of the sector was as high as 15% (Khafagy, 2013). Furthermore, high interest rates are also driven by high executive salaries (for both NGOs and companies) and high profits for &nbsp;for-profit MFIs (companies). Without a legal ceiling on interest rates in the new Law, the interest rates remained at a high level after its introduction in 2014, in addition to other fees and costs that are paid by the borrowers. Interest rates alone can be equivalent to an annual effective rate of 33% for individual loans (16% fixed rate on the total amount of loan), and as high as 60% on group lending (28% fixed rate), which are normally smaller and targeted to women (see Table 1) (Khafagy, 2013; El-Masry, 2021).&nbsp;
There is now empirical evidence of the impact of microfinance, with many studies suggesting that microfinance does not improve the livelihood of low-income borrowers and may even have severe negative implications on their income and wellbeing, especially on women (Bateman &amp; Chang, 2012; Banerjee &amp; Jackson, 2017). Currently more than half of the microfinance borrowers in Egypt are women (see Table 1), who receive smaller amounts of loans and higher interest rates compared to loans granted to men. This is a common phenomenon as the model initiated by Yunus was mainly targeting low-income women through group lending, because women have smaller businesses, and stronger social relationships among each other. More than 92% of group lending borrowers in Egypt are women (FRA, 2021).&nbsp;
Like poverty reduction claims, microfinance was oversold as an instrument of women&rsquo;s empowerment, in which giving loans to women was assumed to help them generate income and become more independent. Again, these promises were never attained, with overwhelming evidence that microfinance can harm women and put them under more control from the male members of the family. This is because microfinance programs that target women do not actually address power imbalances in the society, and therefore it is easy for male members to take control over the money while leaving women liable for the repayment of the loan. In the cases where women had control over the money, there is the additional pressure to run the microbusinesses beside the existing gendered domestic labor placed upon them (Horton, 2017; Yeboah et al., 2015).
<h3>Financial inclusion is not an aim by itself&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</h3>
Access to finance cannot be an aim by itself, regardless of the cost and conditions of the loans. The current model of microfinance, characterized by high interest rates, no grace period, short-term maturities and tight repayment schedules is not suitable for most of the financial needs of microbusinesses and may even harm the businesses, leading to serious debt traps. Current microfinance products can only be suitable for short-term liquidity of quick turnover businesses. Therefore, most borrowers in Egypt are operating in the trade and services sectors (77%), whereas 16% of the borrowers work in agriculture and only 7% in the manufacturing sector (FRA, 2021).
While there will always be some success stories of borrowers benefitting from the services, we cannot attribute such stories to a systemic success of the sector, and surely cannot claim that microfinance is successful in eradicating poverty, empowering women or achieving economic development. On the contrary, it is obvious that commercial microfinance is not adequate for any tangible change to the current economic and social structure. Even in the pure economic sense, after more than 30 years, the sector has not solved the undercapitalization problem of micro and small businesses in Egypt or linking small businesses with the banking sector to obtain long-term finance (Adly, 2020).&nbsp;
The oversold idea of eradicating poverty solely through microfinance has disappeared in silence, and now the focus is on financial inclusion without a compelling rationale behind why financial inclusion is desirable in itself. In Egypt, the current national policy &ndash; following the advice of the World Bank and International Monetary Fund &ndash; places a strong focus on including people into the financial sector without addressing the structural problems that sustain the low-income levels of microbusinesses and low wage rates. Although, the national policy seems more transparent, as it aims at the formalization of the informal sector without overselling it as a magic tool for poverty reduction. But the question remains: how can finance support social and economic development?
<h3>Financing development in Egypt</h3>
Financing the modernization of micro and small businesses is not profitable for commercial banks or microfinance institutions, and we need alternative institutions for this purpose. Previous experiences of industrialization in Germany, Italy, Japan, Taiwan and South Korea, as well as China, did not rely on market-oriented financial institutions, and were based on the support of special financing services provided by state-owned development banks or cooperative banks (Amin, 1974: 436; Deeg, 1999; Cho &amp; Kim, 1995; Park, 1993).
In April 2021, the Egyptian government announced the implementation of the National Structural Reform Programme (NSRP) (Reuters, 2021). The NSRP will focus on industrial deepening and growth of real economy sectors, especially, manufacturing, agriculture, telecommunications and information technology. The details of the policy are still not clear, but we hope it will be a broad industrialization policy that places focus on micro, small, and medium finance.&nbsp;
The government should dedicate specialized departments for development finance within existing state-owned banks or create a new state-owned development bank. In addition, it should encourage the creation of members-owned cooperative banks as alternative institutions for financing micro and small businesses. These banks would not target profit maximization, but instead would focus on short-term financing of working capital, and long-term financing of equipment and other fixed assets to support the modernization of businesses. These loans can be riskier, and development and cooperative banks should be prepared and encouraged to absorb greater risks than commercial financial institutions. The NSRP should also address the institutional and market barriers that depress domestic industries &ndash; including micro and small businesses &ndash; in the first place, such as licensing, lack of training and information. This will not only benefit micro and small businesses but will also have greater macroeconomic benefits in terms of economic growth and income redistribution.
<hr>
<a href="#_endref1">[i]</a>&nbsp;Earlier forms of micro and small finance in Egypt can be traced back to the cooperative movement in 1908 (Rashad, 1939), the Principal Bank for Development and Agricultural Credit (PDBAC) in the 1950s and the Mit-Ghamr Savings Bank in 1963.
<a href="#_ednref2">[ii]</a>&nbsp;Besides commercial banks that are supervised by the Central Bank of Egypt, there are four types of non-bank MFIs that are supervised by the Financial Regulatory Authority. These are: 1) for-profit companies; 2) Tier 1 NGOs with microfinance portfolios of more than EGP50 million (big NGOs); 3) Tier 2 NGOs with microfinance portfolios of more than EGP10 million and less than EGP50 million; and 4) Tier 3 NGOs with microfinance portfolios of less than EGP10 million.
<a href="#_ednref3">[iii]</a> By the end of 2020, the loans of at least 2.9 million out of 3.2 million borrowers were insured under the compulsory insurance against death or total disability (FRA, 2021).&nbsp;
<hr>
References
<ul>
<li>
Adly, A. (2020). Cleft capitalism: The social origins of failed market making in Egypt. Stanford University Press.&nbsp;
</li>
<li style="font-size: 10pt;">
Amin, S. (1974). Accumulation on a world scale: A critique of the theory of underdevelopment (Vol. 1 &amp; 2). Monthly Review Press: New York.
</li>
<li style="font-size: 10pt;">
Banerjee, S. B., &amp; Jackson, L. (2017). Microfinance and the business of poverty reduction: Critical perspectives from rural Bangladesh. Human Relations, 70(1), 63-91.
</li>
<li style="font-size: 10pt;">
Bateman, M. and Chang, H.J. (2012). Microfinance and the illusion of development: From hubris to nemesis in thirty years. World Economic Review, 1, 13&ndash;36.
</li>
<li style="font-size: 10pt;">
Central Bank of Egypt. (2020). Financial Stability Report 2019. Central Bank of Egypt: Cairo.
</li>
<li style="font-size: 10pt;">
Cho, Y. J., &amp; Kim, J. K. (1995). Credit policies and the industrialization of Korea (World Bank Discussion Papers No. 286). World Bank: Washington D.C.
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Deeg, R. (1999). Finance capitalism unveiled: Banks and the German political economy. University of Michigan Press.
</li>
<li style="font-size: 10pt;">
Financial Regulatory Authority. (2017). Annual report on microfinance activity at the end of 2016. Egyptian Financial Regulatory Authority: Cairo.
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<li style="font-size: 10pt;">
Financial Regulatory Authority. (2021). Annual report on microfinance activity at the end of 2020. Egyptian Financial Regulatory Authority: Cairo.
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<li style="font-size: 10pt;">
Financial Supervisory Authority. (2010). Microfinance in Egypt brief overview of current status. Egyptian Financial Supervisory Authority: Cairo.
</li>
<li style="font-size: 10pt;">
El-Masry, M. (2021). At an interest rate of 28% ... How do you get a loan from a microfinance company? Masrawy. Retrieved on 23/05/2021, <a href="https://tinyurl.com/2kahhu9b">https://tinyurl.com/2kahhu9b</a>.
</li>
<li style="font-size: 10pt;">
Horton, L. (2017). Women and microfinance in the global south: Empowerment and disempowerment outcomes. Cambridge University Press.
</li>
<li style="font-size: 10pt;">
Khafagy, A. (2013). Towards reasonably priced microcredit: Analysing Egyptian NGO-MFIs' cost structure and financial performance. Enterprise Development and Microfinance, 24(4). 328-345.&nbsp;
</li>
<li style="font-size: 10pt;">
Khafagy, A. (2019). The economics of financial cooperatives: Income distribution, political economy and regulation. Routledge.
</li>
<li style="font-size: 10pt;">
Park, Y. C. (1993). The role of finance in economic development in South Korea and Taiwan. In Giovannini, A. (Eds.). Finance and development: Issues and experience (pp. 121-157). Cambridge University Press.
</li>
<li style="font-size: 10pt;">
Reuters. (2021). Egypt targets GDP growth of 6-7% over next 3 years, announces reform plans. Retrieved on 23/05/2021, <a href="https://www.reuters.com/world/middle-east/egypt-targets-gdp-growth-6-7-over-next-3-years-announces-reform-plans-2021-04-27/">https://www.reuters.com/world/middle-east/egypt-targets-gdp-growth-6-7-over-next-3-years-announces-reform-plans-2021-04-27/</a>
</li>
<li style="font-size: 10pt;">
Yeboah, T., Arhin, A., Kumi, E., &amp; Owusu, L. (2015). Empowering and shaping gender relations? Contesting the microfinance&ndash;gender empowerment discourse. Development in Practice, 25(6), 895-908.
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</ul>

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