Regulating penny loans

The new law will provide small businesses with loans up to LE100, 000

Two weeks ago, president Abdel-Fattah Al-Sisi approved the country’s first microfinance law, which, prepared by the Egyptian Financial Supervisory Authority (EFSA), will allow companies and NGOs to finance projects that do not meet the requirements for bank loans.

According to Reuters, the government consulted the World Bank and other institutions when drawing up the law. Microfinance, meaning the provision of very small loans, can help to create jobs by giving individual entrepreneurs the possibility of accessing credit in cases where the regular banking system does not.

There are two companies and 450 NGOs affiliated to the Ministry of Social Solidarity that are qualified to offer this type of loan. However, they still need to acquire licenses to offer such services from the EFSA, which has given them six months to do so under the requirements of the new law.

Moataz Al-Tabaa, manager of the Alexandria Business Association and chairman of the Global Microfinance Network, told Al-Ahram Weekly that the new law included complicated procedures and charged high fees to those wishing to acquire a license.

NGOs or companies seeking a license should have capital of LE5 million at least, leading Al-Tabaa to expect that 300 of the qualified NGOs will want to exit the microfinance market in Egypt “especially in remote areas because they can’t afford this burden.”

The EFSA was granted $4 million by the World Bank to implement the new law. Al-Tabaa suggested allocating a part of this to helping smaller NGOs, those serving 500 clients or less, to pay the license fees.

Between 2005 and 2012 the NGOs served some one million active borrowers with an aggregate micro-credit portfolio of approximately $266 million, according to Egyptian Microfinance Network data. But Al-Tabaa said the micro-credit covered only 15 per cent of Egypt’s needs last year.

While the current ceiling for micro-credit loans ranges from LE25,000 to LE30,000, the new law will increase this to LE100,000.

EFSA head Sherif Sami told the media that the new law would provide a reliable supervisory system and place clear regulations on how to manage the risk of lending by laying out requirements for financial solvency.

Amr Abo Eish, manager of Tanmieh, a micro-finance company affiliated to the Egyptian Gulf Bank, praised the law as “there are many projects that need small and micro-sized loans that have failed to get them from the banks.”  

However, he criticised the law for not allowing NGOs or companies to receive deposits as is the case in other countries.

“They are short on liquidity, and this limits their capacity to lend to small borrowers,” he said.