Access to Finance and Economic Growth in Egypt

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In this context, the study titled “Access to Finance and Economic Growth in Egypt" aimed at helping inform the Egyptian government’s efforts in financial reforms in a bid to increase the role of the private sector in financial services provision, particularly to SMEs and households, while strengthening risk management in financial institutions. The study was led by Sahar Nasr, Lead Financial Economist, Social & Economic Development Group, Middle East & North Africa Region.

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.

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.

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 income. Relative to the developing world, Egypt’s branch density is low, and its ATM coverage is less than one-seventh that of the typical developing country.

The study finds that banks tend to concentrate on the urban population. State-owned banks lend mainly to large corporations, while private, joint venture, and specialized state-owned banks, followed by foreign banks, are more active in lending to SMEs. Large corporate-sector loans are as large as 70 percent of total loans for many banks, with SME lending accounting for only 20 percent, and retail lending only 10 percent of total loans.

The study highlights the significance of improving the access to finance for Small and Medium Enterprises (SMEs). 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 SMEs—the majority of firms in Egypt—rely heavily on the informal market.

Therefore, formal financing, whether from banks or non-bank financial institutions, plays a limited role in financing enterprises, especially SMEs. More than 37 percent of the firms consider access and cost of finance major obstacles to growth. The large majority of Egyptian manufacturers rely exclusively on their own funds; only 17.4 percent have access to finance from the financial sector. This is especially striking for small firms—only 13 percent have access to finance, as opposed to 36 percent for large firms. While the average for Egypt is comparable to the other countries in the Middle East and North Africa (MENA), it is significantly below that in other developing countries.