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Looking back about one year in time, many things are not as they used to be in the Arab region in general and in North Africa in specific. The so-called Arab spring which started in the beginning on 2011 affected almost all dimensions of life including politics, the economy, and society. The microfinance sector was no exception. In particular the impact on MFIs and their clients has been widely discussed within the last months. Many MFIs were unable to physically visit their clients due to the unstable security situations, some clients were simply not able to repay credits as their businesses have been heavily affected by the turmoil, and other clients did not pay back their loan since legal consequences were not to be expected under these circumstances.
However, in addition to this direct impact at the operational level, also a link on the policy level exists, raising various questions: How will the political change affect the framework conditions of the microfinance sector? Will it rather boost or hamper initiatives to reform legal conditions? While we already see some first results in Tunisia where a new microfinance law was passed last year as a consequence of a new political environment, a closer look has to be given to the Egyptian case, where the overall process of political change is taking more time.
In Egypt, some initiatives to enhance the legal framework conditions of the microfinance sector already existed before the revolution started. However, these have been rather delayed by the recent political developments. Initiated by the Ministry of Investment back in 2008 and with support from development partners, a set of regulations has been developed. One major objective of these regulations is to professionalize the sector and enable new players to enter the field. Whereas currently only banks and NGOs are allowed to offer credit, a new institutional type of lending institution shall be created: microfinance companies. While these companies will not be allowed to collect savings, they would be able to run a profit-oriented business with low entry barriers (no minimum capital requirements). Also, the Egyptian Financial Supervisory Authority (EFSA) has been set up, which among other things is supposed to supervise these newly to be established microfinance companies. The draft law on formally assigning EFSA this role has already been approved by the Cabinet and sent to Parliament. This happened just before the political upraise started. Currently, the overall process is on hold as the new parliament is about to become operational.
Wh While the overall process is being delayed, there are many reasons to be optimistic about the future of microfinance in Egypt. During the past couple of months’ political change process, many questions arose on how this process will impact all the efforts made in the past to promote the microfinance sector. While at this point in time, no final judgment can be made, some first indications exist:
- More than ever, in the current transitional period, a well developed MSME sector is considered core for employment generation and poverty reduction: Similar to the case of Tunisia, current political decision makers identified the MSME sector to be crucial for economic development. This importance is underlined by various initiatives, such as ideas in the past to create an SME bank (which is currently not followed up), or the assignation of an advisor to the Prime Minister on the promotion of the (M)SME sector.
- It is quite likely that also in the future the above mentioned position will be upheld: While no detailed program on economic policy by future decision makers does exist so far, some general assumptions can be made, based on public statements and ongoing debates on future directions: i) private business will be promoted ii) financial markets will be protected iii) (M)SME lending will be enhanced.
- Religious aspects will become more important in day-to-day life: It became evident that religion will play a stronger role in the future than in the past. These elements may also lead to increased efforts of selected financial institutions on alternative financial instruments, such as Islamic finance products which so far have played a rather minor role in the Egyptian microfinance sector.
- Microfinance will most probably not be the first issue to be tackled under any new government: Taking into consideration the huge political challenges in the country, it is understandable that enhancing the microfinance sector will not be the first priority of any future government. Thus, results cannot be expected in the short run.
Wh While no political decisions may be taken for the moment, it is important not to lose the momentum and get ready for the future. The current transition state does not mean that nothing can be done to move the regulatory agenda forward. The following points represent some potential areas of action in the short term:
- Join forces: A broad set of players in Egypt is affected by or involved in regulatory issues of the microfinance sector (MFI, public bodies, donors, etc.). Forces have to be joined and aligned to set the path for the future. The creation of a working group could be a good start.
- Enhance dialogue between the public and private sectors: New policy decision makers may need to be sensitized about the importance of microfinance. Such tasks could fall into the scope of actions of a working group.
- Review draft regulations: There still exist differing views among the major players on selected issues of the regulations (e.g. lack of transformation possibilities from a NGO to a Microfinance company). The new political set up may be taken as a chance to commonly review and discuss the current regulations.
While no clear cut answer can yet be given to the question raised above, there are many indications to believe that by the end of the day, the Arab Spring movement will positively impact (legal and regulatory) framework conditions in Microfinance.
Johannes Majewski works for GIZ as a Program Coordinator of a regional microfinance program based in Egypt. Areas of intervention of the program include the strengthening of regulatory frameworks of the microfinance sector in selected countries of the Mena region as well as support to the Sanabel network. The program is being implemented on behalf of the Federal Ministry for Economic Cooperation and Development, Germany. Before joining GIZ, Johannes worked for Frankfurt School of Finance and Management in Germany and South America.