Formal and Informal finance in Egypt

- by Dale W. Adams, Univ. of Ohio -

During a recent visit to Egypt I looked more carefully into research that documented formal and informal finance in 5 representative villages. Several features stand out in this information.

The first is that many people regularly use both formal and informal loans at the same time. It is not uncommon for an individual to have a loan from a commercial bank, another loan from the ag. bank, still other loans from merchants, and also participate in a self-help financial group (gam'iya).

Second, many people have loans and deposits at the same time. This includes holding deposits in commercial banks, having accounts in the postal savings system, and saving through participating in gam'iyas.

Third, overall there are dense networks of finance operating in these villages. All of the villages had an office of the government-owned ag. bank and postal savings facilities. None of the villages had commercial bank branches, but many of the villagers worked in adjacent towns with ample banking facilities. Moneykeepers, numerous merchants who sold on credit, and many gam'iyas provided further financial services in the village. Furthermore, relatively large numbers of families in these villages had relatives working elsewhere who regularly sent them remittances. Overall, the annual magnitude of these rural remittances likely amounts to twice or more the total amount of new lending done yearly by the ag. bank!

Fourth, informal and formal finance in these villages are interwoven. A merchant who lends informally may have a bank loan. A moneykeeper who accepts informal deposits may also have a savings account with a bank. A women may organize a gam'iya to collect money to pay off a loan taken by her husband from the ag. bank. A merchant who makes informal loans may also receive goods on credit from a wholesaler who, in turn, has bank loans. A man may deposit his winnings from a gam'iya in a bank account.

When one has information on the entire financial system that operates in these village it is difficult to argue--in my opinion--that large numbers of people have a pressing need for credit. Perhaps one of the reasons why so many credit-driven project fail is because they are based on assumptions about credit needs that are incorrect.

Case Example:

An excellent microenterprise lending program in Alexandria, Egypt. It is run by the Alexandria Business Association, sponsored by USAID, lends to about 20 thousand borrowers, and has a total loan portfolio of about $10 million.

The operation is completely computerized which keeps lending costs down and allows tight control of loan recovery. Loan officers are expected to be out of office after 10:30 in the morning seeking new clients and following up with borrowers. The program uses a simple yet powerful incentive formula to energize loan officers. A large part of their compensation is based on performance, they must sustain a 97% loan recovery to receive any performance bonus, and they are also rewarded according to number of old and new clients they serve. Some of the loan officers manage as many as 200 loans and all are expected to manage 100 plus loans.

The effective rate of interest charged on loans is 30% plus per year, little emphasis is placed on collateral, borrowers are allowed only small loans initially, and loans are repaid in small installments over relatively short periods of time. As borrowers prove their trustworthiness the size of loan is increased and the loan term is extended.

Grafting this type of microlending technology into existing development banks could prove beneficial. This will require more use of computers, changes in employee incentives, and charging higher rates of interest than development banks typically charge.

Hari Srinivas -
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