Executive Summary

There is a large unmet demand for microfinance services among the entrepreneurial poor in Egypt. It is estimated that Egypt microfinance initiatives currently reach only about 5 percent of the more than 2 million potential borrowers. In this situation, commercial banks could play an important role since they have the advantage of both outreach capacity through their branch networks and fundraising capacity through their legal ability to accept savings and deposits.

Traditionally, commercial banks in Egypt, as in many other developing countries, have shed away from microfinance, perceiving it as very risky and low-rewarding. The National Bank for Development (NBD) in Egypt, however, has had a different experience. A private commercial bank, NBD has successfully run a microlending program for over 16 years.

Microlending programs have existed in Egypt since the mid-1960s. Most microfinance services are delivered through government and nongovernmental organization (NGO) programs and some are conducted through business associations, development intermediaries, and public sector and special-purpose banks. Until recently, microfinance services in Egypt have only existed within broader human development and social safety net strategies.

An important microfinance provider is the Egyptian Social Fund for Development (SFD), which distributes sizable amounts of its funds through NGOs. There are also several national and international NGOs that have been more effective at dealing with the credit needs of the poor; they lack the infrastructure and institutional setup to expand beyond their local communities. The NBD has been the first commercial bank to start microfinance operations in Egypt.

Realizing the twin potential, for banks, of microlending for generating profits while helping to combat poverty in Egypt, the NBD, in collaboration with the U.S. Agency for International Development (USAID), has established the Small and Microenterprise Division in 1987 with microlending operations in four of its branches. By 2003, microlending services have been delivered to 22,600 active borrowers with about $8.2 million in outstanding loans in 44 branches.

The NBD’s approach to microfinance

In the Egyptian microfinance context, the NBD microlending program represents a unique operation. Modeled in part after the Grameen Bank, the NBD program combines the attitude of NGOs and the sound financial principles of banks, to make microenterprise lending a sustainable operation. This vision has been translated into flexible lending procedures and client-oriented service delivery through well-trained and motivated bank staff. At the same time these principles have shaped and guided the starting up, the progress, and the expansion of the NBD microlending program over the past 15 years and have contributed to its profitability.

In the short run, the NBD’s objective is to provide microenterprises with access to credits which would traditionally be denied by conventional banks. In the long run, its objective is to turn these borrowers into clients with more conventional banking standards.

Besides these two objectives there are several other considerations to point out: improving the quality of life of small borrowers, promoting employment generation, preserving and expanding small enterprises and fostering better business practices among the poor. The NBD deals with small borrowers with already existing enterprises that are neglected by traditional banking institutions.

The NBD loans are small and with short maturities. Up to  2000, the maximum loan size was LE10,000 (approximately $3000). To further extend its outreach to the poor, in 2000 the bank management has decided to reduce the maximum loan size to LE3,000 (approximately $500 at the June 2003 prevailing exchange rate). Total bank charges are about 30 percent. No collateral is required and loan approval is based on the enterprise feasibility and its cash flow cycle. The program is targeted for the poor: the average loan size is $480 while a typical poor household of six persons in Egypt has an average expenditure level of $1,358 per annum (2002 data).

The NBD has also made special efforts in recent years to reach female clients; as a result, the proportion of loans to women has risen from around 13.5 percent in 1998 to around 22 percent today. The program has been profitable for over 10 years. Yet, at just under 18 percent, the profit rate of the microlending operations is higher than the rate in more conventional lending bank operations.

A unique feature of the NBD structure is its mobile banking units. While this brings additional costs, NBD has been able to recuperate  the costs since the poor are willing to pay for having services at their doorstep. 

Loan approval procedures are transparent and quick since the entire process generally takes less than two weeks. Close supervision, while costly, supports the viability of individual enterprises and ensures high repayment rates. Another program innovation is the provision of life insurance coverage to all the borrowers and a mandatory saving component to be held in an NBD interest-bearing account.

The possibility of repeating borrowing is also an important feature. In 1998, NBD statistics for a sample of branches showed about 76,700 repeat loans for a total value of $74.2 million, representing over 70 percent of the total value of loans disbursed and about 10 loan cycles.

Maintaining steady growth in its client base is one of the NBD’s challenges. NBD managers emphasize that the program growth is constrained by the high cost of reaching microfinance clients. NBD has chosen to serve these clients through specially trained and remunerated officers rather than using its regular work force. This practice involves high administrative costs. Another challenge is to find a level of loan charges that maintains profitability but does not choke off program growth over time. Another continuing challenge for NBD will be balancing its targeting objective with that of helping clients get more benefits out of borrowing and/or maintaining steady program growth.

The NBD program’s impact

Today 20 of NBD’s 44 branches are donor-financed (17 by USAID and 3 by the Canadian International Development Agency, the United Nations Children’s Fund, and the Ford Foundation) and 24 are self-funded. Program outreach also grew to about 22,600 borrowers, generating an $8.2 million loan portfolio.

NBD’s microfinance program achieved profitability very quickly.

So far no systematic and statistically-sound quantitative assessment has been conducted on the NBD microcredit program impact on the livelihoods of its beneficiaries. From a selected sample of repeat borrowers, however, NBD staff has noted increases in the number of employees in beneficiaries’ enterprises and that over 60 percent reported an increase in their incomes of more than 50 percent. Other studies in Egypt have found modest improvements in living standards of microcredit recipients, including nutritional benefits. Some impact studies in Egypt suggest that microcredit programs may be less effective in reaching the vulnerable; this may be because the poor are best served by direct assistance measures, while microfinance services are more effective when tailored for the entrepreneurial poor.