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BRINGING SMART POLICIES TO LIFEFINANCIAL INCLUSION THROUGH DIGITAL FINANCIAL SERVICES AND FINTECH: THE CASE OF EGYPTCASE STUDYCENTRALBA N K OFEGYPTCONTEXT 3OBJECTIVE 3INTRODUCTION 4EGYPT AT A GLANCE 4KEY REGULATORY AND MARKET INFRASTRUCTURE CHALLENGES 6INITIATIVES TO OVERCOME INFRASTRUCTURAL, OPERATIONAL, LEGAL AND REGULATORY CHALLENGES 7EFFORTS GOING FORWARD 9CONCLUSION 11 2018 (August), Alliance for Financial Inclusion. All rights reserved.CONTENTSACKNOWLEDGMENTThis case study is an official contribution made by the Central Bank of Egypt (CBE). The report was prepared by Mr. Ehab Nasr, Head of Payment Systems, CBE, and Mr. Mohamed Helmy, Senior Business Officer, Payment Systems Department, CBE, with contributions from members of the payment systems department. Mr. Ali Ghiyazuddin Mohammed, Policy Manager, Digital Financial Services at AFI, also contributed to the report through inputs and comments.3FINANCIAL INCLUSION THROUGH DIGITAL FINANCIAL SERVICES AND FINTECH: THE CASE OF EGYPT CONTEXT The Central Bank of Egypt (CBE) takes its responsibility for promoting and coordinating financial inclusion in Egypt seriously, and considers it a strategic objective that can be pursued alongside its primary objective of ensuring a stable and sound financial system. With the Government of Egypts launch of the Sustainable Development Strategy (SDS): Egypts Vision 2030,1financial inclusion has become a national priority. A core focus area of the countrys overall sustainable development strategy, financial inclusion has the potential to create more opportunities for inclusive growth, maintain financial and social stability and achieve other national goals. Given the complexity of coordinating various national stakeholders, each of which has a distinct and important role to play in advancing financial inclusion in Egypt, CBE has adopted a multi-pronged approach. At the global level, CBE became a principal member of the Alliance for Financial Inclusion (AFI) in July 2013. Membership in AFI has exposed CBE to international good practices in financial inclusion and opened opportunities for systematic peer learning. It has also helped to position financial inclusion at the top of CBEs policy agenda and reinforced its commitment to it.2CBE not only plays a central role in promoting financial inclusion in Egypt, but it also provide advice and recommendations at the global level as part of AFIs Board of Directors and as a member and Vice-Chair of the Gender and Womens Financial Inclusion Committee (GWFIC). CBE has been increasingly engaged in AFI activities and services, from participating in every Global Policy Forum (GPF) since 2014, to hosting the 2017 GPF in Sharm El Sheikh. Representatives from CBE have been active participants in AFIs capacity building programs and regional initiatives,3and after an initial focus on the financial inclusion data work stream, CBE now has representatives in all six AFI working groups.4CBEs dynamic efforts to promote greater financial inclusion in Egypt is also evident in its Maya Declaration commitments, nine in total, which cover womens financial inclusion, e-money, the national payments system, digital financial services (DFS), consumer protection and SME finance. Some critical DFS commitments include: i) stimulating DFS through issuing tiered Know Your Customer (KYC) requirements for mobile money users (Achieved); ii) implementing interoperability among mobile money providers (Achieved) and between mobile money accounts and regular bank accounts (Partially Achieved);iii) proposing a draft law to stimulate digital financial transactions (Developed); andiv) enforcing electronic payments for suppliers from government entities that exceed a certain threshold (Achieved).At the regional level, CBE is a member of the Council of Arab Central Banks Governors of the Arab Monetary Fund (AMF) and an active member of the Financial Inclusion Taskforce (FITF) since its inception. CBE has not only accelerated these efforts, but introduced several new initiatives to strengthen the financial inclusion agenda in line with local needs and global trends. CBE has also been energizing key stakeholders to advance financial inclusion in the country through a highly collaborative and systematic approach.51 SDS Egypt 2030: sdsegypt2030/?lang=en 2 Report on Egypts Journey to Financial Inclusion3 2017: GIZ-AFI Training on NFIS, the Joint Learning Programme on Proportionality, BNM-AFI Training on AML/CFT and 2017 AMPI Leaders Roundtable in Maputo4 Consumer Protection and Market Conduct (CEMC), Digital Financial Services (DFS), Financial Inclusion Data (FID), Financial Inclusion Strategy (FIS), Global Standards Proportionality (GSP) and SME Finance (SMEF) Working Groups5 Report on Egypts Journey to Financial Inclusion.OBJECTIVETHE OBJECTIVE OF THIS CASE STUDY IS TO DOCUMENT EGYPTS EXPERIENCE IN LEVERAGING NEW TECHNOLOGIES/FINTECH TO ACHIEVE FINANCIAL INCLUSION.4FINANCIAL INCLUSION THROUGH DIGITAL FINANCIAL SERVICES AND FINTECH: THE CASE OF EGYPT 6 Data was collected by CBE through phone interviews using a structured questionnaire on the use of formal financial services and products between June 2015 and June 2016. The sample size was 2,000 adults defined as 21 years old and above. The survey was limited to the use of formal financial services. 7 enterprise.press/stories/2017/10/01/capmas-releases-2017-national-census-results/ INTRODUCTIONOne of the most populated countries in Africa and the Middle East, Egypts population was estimated at 96.3 million7in Q1 2018, with about 95 percent living in the Nile Delta region and along the banks of the Nile. As shown in the demographic statistics below, the poverty rate is close to 30 percent and 42.5 percent of the Egyptian population lives in urban areas. In 2016, Egypts GDP was USD 332.791 billion.EGYPTS FINANCIAL SYSTEM According to 2018 figures, there are 39 banks and more than 2,800 branches across Egypt. Sixteen of these banks offer full service e-banking and mobile financial services with 133,651 mobile payment agents (including branches as of May 2018). Further, by the end of 2017, there were 3,900 ENPO branches, 873 licensed microfinance institutions (MFIs) and nongovernmental organizations (NGOs) with 848 branches (total of 1,721). Further, by the end of 2017, Egypt had 140 brokerage companies, 37 insurance companies, 226 leasing companies and 13 mortgage companies.EGYPTS DIGITAL ECOSYSTEMDigital players are well represented in Egypts formal financial system. As of March 2018, there were 11,582 ATMs and 70,509 POS, and more than 15.9 million debit cards, 10.6 million pre-paid cards and 4.8 million credit cards were in circulation.FINANCIAL SERVICES USAGE BY PRODUCT TYPEMOBILE PAYMENTS (AS OF MAY 2018) Mobile payments in Egypt operate on a bank-led model and mobile network operators (MNOs) have the greatest market share. Table 1 breaks down the overall use of mobile payments in May 2018.According to data from a limited demand-side survey,632.4 percent of adults (21+ years) reported having a formal account with a bank or Egyptian National Postal Organization (ENPO), while 48 percent use some type of financial service, such as an insurance policy or ATM. Women in Egypt are more excluded from the financial system than men, with 10 percent fewer women on average having transactional accounts. Meanwhile, the vast majority of MSMEs do not have access to or use formal financial services and products, forcing most to rely on a range of informal mechanisms. The survey data also suggests that financial inclusion is driven by direct salary transfers, indicating that financial inclusion is characterized more by passive use of financial services (e.g. salary and cash transfers) than active use.EGYPT AT A GLANCE FIGURE 2: GEOGRAPHY OF EGYPT FIGURE 1: FINANCIAL INCLUSION USAGE IN NUMBERSUse at least one serviceUse accounts for transactionsSave and borrow moneyHave mobile accountsMsMEs have loans48%32%11%10%5%5FINANCIAL INCLUSION THROUGH DIGITAL FINANCIAL SERVICES AND FINTECH: THE CASE OF EGYPT FIGURE 3: EGYPTS GDP 2016 (CURRENT US$ BILLION)3002502001501005001960 2013 1980 2015 2000332.791 BILLION350AT A GLANCE27.8%OF THE POPULATION LIVE IN POVERTY (2015)96.3 MILLION POPULATION* OF EGYPT WITH 51.5% ARE MALE57.5% OF THE POPULATION LIVE IN RURAL AREAS 56.3% ADULTS USE MOBILE PAYMENTS IN EGYPT * (20+)27GOVERNORATES ACROSS EGYPT11.8% OF THE POPULATION ARE UNEMPOLOYED* Source: CAPMAS, 2018* Source: CAPMAS, 201751.5% 48.5%57.5%42.5%Mobile money services in Egypt, as per the new regulations, include cash-in/cash-out, person-to-person (P2P), person-to-merchant (P2M), merchant-to-merchant (M2M), ATM cash-in/cash-out, international money transfers (IMT), virtual card number (VCN) and account value load (AVL) from bank to wallet accounts.INTERNET BANKINGThirty-two of Egypts 39 banks offer internet banking services. This represents 1.4 million registered accounts and EGP 128 million EGP (approximately USD 7 million) in transaction volumes.GOVERNMENT EMPLOYEE RECEIVABLES THROUGH BANKING PAYMENT CARDS4.5 million cards were issued by 2,800 governmental institutions for payroll and seven million cards for pensions.EMERGING OPPORTUNITIESIn terms of digital financial services, there are a variety of opportunities to increase usage in the Egyptian market: 109% mobile SIM penetration rate; More than 48% smartphone penetration rate; More than 31 million mobile internet users with a 3.35% annual growth rate; More than 37.9 million internet users with a 44.3% penetration rate; Potential spread from the explosion of online and social media; and More digital financial services to serve Egyptians.TABLE 1: USE OF MOBILE PAYMENTS IN EGYPT, MAY 2018Mobile accounts 10.5 millionAnnual growth rate (year on year) 30%Unique users 9.4 millionAge: 50 years old 16%3550 years old 29%25c35 years old 31%2550 years old 60%2025 years old 16%133,600 6FINANCIAL INCLUSION THROUGH DIGITAL FINANCIAL SERVICES AND FINTECH: THE CASE OF EGYPT CBE recognizes that the rapid development and extension of digital platforms can reach financially excluded and underserved populations quickly, securely, transparently and cost-efficiently, with a range of financial services suited to their needs.Digitization of payment systems and other financial services face several ongoing challenges, including Egypts strong cash culture, expansive geography and limited accessibility and acceptance of DFS. These challenges have been the main catalyst to paving the way to a cashless society through digital financial services. The main legal and regulatory barriers to DFS in Egypt are presented below.KYC REGIMEKYC/CDD requirements were a major obstacle to bringing more customers into the financial ecosystem, as full KYC rules were applied and opening an account was complex because of the documents required to verify a customers identity and agents not being allowed to conduct the KYC process.Limited use cases: Some types of money transfers/payments were not regulated/permitted, such as IMT, P2M, M2M, one-to-many transactions/disbursements (payroll, pensions, etc.), AVL, bank account to e-wallet and vice versa.LACK OF INTEROPERABILITYThere was not account or agent level interoperability within the ecosystem.SMALL DAILY AND MONTHLY LIMITSPrevious transfer limits were EGP 3,000 daily and EGP 25,000 monthly.CONSUMER PROTECTION AND CYBERSECURITYUnder the new regulations, banks should establish consumer protection measures and systems that provide customers with confidence and protect them against risks, fraud, loss of privacy, threats and criminal activities.Other market and infrastructure challenges in Egypt include:LACK OF STABLE MOBILE AND INTERNET CONNECTIVITYStable mobile and internet connectivity is essential to enable digital transactions. Mobile penetration in the country stands at 109.45 percent, indicating that users have more than one SIM subscription. Interestingly, only 29.42 percent of these subscriptions have internet access. 8 speedtest/reports/egypt/ 9 euromoney/article/b1511t0mrsk6pr/egypt-seeks-financial-inclusion-with-a-digital-revolution 10 worldbank/en/news/press-release/2017/07/27/world-bank-group-itu-and-cpmi-launch-financial-inclusion-global-initiativeOverall, internet penetration is relatively low at 37.8 percent and is a potential barrier to adoption and usage of mobile financial services.8LACK OF CONSUMER TRUST IN FORMAL FINANCIAL SERVICESAccording to the World Bank, 44 million Egyptians are eligible to enter the formal banking and financial services sector. However, issues such as high charges/commissions and fears that banks may not be shariah-compliant have weakened consumer trust in formal financial institutions.9LIMITED TIME AND RESOURCES FOR DFS BY MARKET PLAYERSThere is insufficient funding available to implement the reforms arising from Egypts new laws, regulations and financial and ICT infrastructure. Service providers also need additional assistance to improve product design, increase financial literacy and awareness, diversify access points and manage high-volume (low-value) retail payments.10To overcome these challenges, it is critical to develop sustainable digital financial services.KEY REGULATORY AND MARKET INFRASTRUCTURE CHALLENGES 109.45% MOBILE PENETRATIONINDICATING THAT USERS HAVE MORE THAN ONE SIM SUBSCRIPTION44 MILLIONEGYPTIANS ARE ELIGIBLE TO ENTER THE FORMAL BANKING AND FINANCIAL SERVICES SECTOR7FINANCIAL INCLUSION THROUGH DIGITAL FINANCIAL SERVICES AND FINTECH: THE CASE OF EGYPT management of risks associated with mobile payment services, roles and responsibilities and AML/CFT rules. It also covers controls on mobile payment services in the following areas: issuance of electronic money and systems, service providers, mobile payment accounts, means of identification (certification), passwords, money transfers, interoperability, confidentiality and integrity of information, securing applications, security infrastructure and follow-up, security system assessment, responding to and managing events, performance considerations and business continuity. Another section covers customer security and controls for other risks and procedures for obtaining a service license. To include more unbanked and underserved customers through an alternative to informal channels, CBE collaborated with the Egyptian Money Laundering Combating Unit (EMLCU) to develop New Customer Due Diligence (CDD) procedures for mobile payment service customers. With a 109.45 percent mobile penetration rate, more than 30 million internet users in (38% penetration), the evolution of online and social media activism, and the need for more digital financial services to serve the Egyptian population living in dispersed locations, it is critical to develop sustainable digital financial services that will facilitate the shift toward a le
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