Financial Empowerment and Credit Accessibility:A Business Model for Poverty Alleviation in
EgyptBy
Ali A. Massoud*
* The author is an associate professor at Economics Department, Faculty of Commerce, Sohag University, Sohag, Egypt.
Email: [email protected]
Phone: ++20-1148482200.
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Keywords: Financial Empowerment, Financial Inclusion, Credit Accessibility, and Poverty alleviation.
Financial Empowerment and Credit Accessibility:
A Business Model for Poverty Alleviation in Egypt
By
Ali A. Massoud
Associate Professor at the Economics Department, Faculty of Commerce,
Sohag University, Sohag, Egypt
Abstract:
Using finance in order to alleviate poverty is a major topic in
development. Microfinance has received tremendous attention over
the last four decades. The main business models for microfinance
did not deliver the desired outcomes. Both the Grameen Bank model
and the Self-Help Groups (SHGs) Model did not have a significant
impact on poverty alleviation.
The main goal of this paper is to develop a new business model to
deal with poverty in Egypt that can be an alternative for Grameen
and the SHGs models. The main contribution of this paper is
emphasizing the importance of the business environment as a
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complement to the financial aspect of poverty alleviation. The
new concept that the proposed model is built on is “Financial
Empowerment.” This concept includes both financial inclusion in
its broad term and the business environment as an important
aspect for poverty alleviation. The proposed model was
implemented in Tahta Sohag and proved to be a great success so
far.
Introduction:
Poverty is a major global problem. The United Nations, the World
Bank, and international donors have been allocating huge sums of
financial resources for poverty alleviation. Poverty is not a
problem for poor countries only. Rather, it is a problem that
faces developing countries as well. Egypt is not an exception. It
is very important to emphasize that feeding the poor does not
alleviate poverty nor does it solve the challenges that the poor
face. For this reason, the best approach to deal with poverty is
enabling the poor to generate their own income that is enough to
meet their basic needs of food, shelter, clothes, education, and3
health. The poor suffer from challenges that make them worse off
over time. Financial difficulties, low levels of human capital,
and the inability to access financing puts the poor in a vicious
cycle of poverty. I argue that poverty alleviation efforts should
be a part of comprehensive policies for economic growth for the
poor and for social justice. In the short-run the social justice
dimension has to be given more attention in order to deal with
urgent needs for the poor, i.e. food, shelter, health, and
clothes. However, over the medium and long-run, more attention
has to be given to accumulating human capital for the poor and
empowering them financially. Governments must play a vital role
in poverty alleviation because the market fails to provide a
safety net for the poor.
The main business models that have been used by local
governments, international institutions, and donors are the
Grameen Bank Model and the Self-Help Groups (SHGs) Model. Many
studies have shown that both models are not effective in poverty
alleviation. As a matter of fact, instead of leading to
improvement of the financial situation for the poor, they lead to
an increase in the financial vulnerability of the poor. This has
been the case in Egypt as well. As mentioned before, many studies
have shown that the business models for microfinance that have
been used in India, Bangladesh, Bolivia, and other countries did
not have a significant impact on poverty alleviation, Bateman and
Change (2012). This makes the development of a new business model
of poverty alleviation, built on financial empowerment of the
4
poor, as an important contribution to the current literature and
policymaking efforts that target poverty alleviation. All current
models concentrate only on the financial aspect of poverty
alleviation. They do not give enough attention to the other
aspects with which small businesses and entrepreneurs deal, such
as the business environment. Credit availability and financial
inclusion have not proven to have a significant impact on poverty
alleviation. Thus, financial empowerment provides a feasible
alternative for the credit availability and financial inclusion
that have been used in the existing financial models of poverty
alleviation.
This paper proceeds as follows. Section (1) sheds light on the
magnitude of poverty in Egypt. Section (2) explains financial
empowerment as a tool for poverty alleviation. Section (3)
discusses the main characteristics of banks as the main credit
providers in Egypt. Section (4) assesses financial empowerment in
Egypt. Section (5) presents a business model for financial
empowerment and poverty alleviation in Egypt. Section (6)
summarizes with a conclusion and policy recommendations.
(1) The magnitude of poverty in Egypt:
According to the Human Development Report, 2013, published by the
United Nations Development Program (UNDP): 22% of Egyptians are
below income poverty line; the percentage of population who live
on PPP $1.5 or less is 1.7%; the percentage of population who
live in severe poverty is 1%; and the percentage of those who are
vulnerable to poverty is 7.2% of the total population. These5
numbers did not change substantially from what they were in the
Egypt Human Development Report in 2010. According to the latter
report, the percentage of poor people in Egypt in 2008/2009 was
21.6% of the total population. In rural areas this percentage
increased to 28.9% of the total population while in the urban
areas the percentage of poor people was 11% of the population.
The severity of poverty in Egypt differs among governorates. As
table (1) shows, the percentage of poor people in the Upper Egypt
governorates was the highest among all governorates of Egypt. The
percentage of poor people to the total population in this group
was 36.9%. This percentage was 43.7% and 21.3% for rural and
urban areas, respectively. The situation in Lower Egypt
governorates was better. The percentage of poor people in this
group was 14.2% of the total population. This percentage was
16.7% and 7.3% in rural and urban areas, respectively. For
Frontier governorates, the percentage of poor people was 11.1% of
the total population. This percentage was 23.2% and 4.8% for the
rural and urban areas, respectively. For urban governorates, the
percentage of poor people was 6.9% of the total population.
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Table (1)
Poverty indicators in Egypt (2008/2009)
Region Poor People to the total population(%)
Total Rural UrbanEgypt 21.6 28.9 11Urban Governorates 6.9 - -Lower Egypt Governorates 14.2 16.7 7.3Upper Egypt Governorates 36.9 43.7 21.3Frontier Governorates 11.1 23.2 4.8Source: Egypt Human Development Report, UNDP, 2010.
We conclude from the above analysis that even though poverty is a
major problem in Egypt, its severity differs among areas and
governorates. Poverty is more severe in the rural areas and in
the Upper Egypt governorates than it is in the urban areas and in
the Lower Egypt governorates.
(2) Understanding financial empowerment as a tool for poverty alleviation:
In 1970s, Dr. Muhamed Yunus put the foundation of a comprehensive
model of microfinance in Bangladesh. His experiment in micro-
financing evolved to the establishment of the Grameen Bank in
1983. Since that, microfinance has become a major topic in
development and poverty alleviation. Many studies have emphasized
the role of microfinance in the process of poverty alleviation.
Microfinance provides an economic opportunity for the poor to
change their economic situation. Economic opportunity is strongly
linked to access in financial services. Increasing access to
finance for the poor, citizens of the rural areas, and SMEs could
7
help to reduce poverty, enhance economic growth, and diversify
national economies. This approach can be classified as a bottom-
up development model. Shetty (2005) examined the impact of
microfinance on households, welfare, income, employment,
expenditure, assets, and human & social capital. He designed a
field survey and applied it on two rural areas in India in order
to determine the impact of microfinance on the above elements. By
comparing the status of the surveyed households, he found a
positive and significant impact of microfinance credit plus
services on all variables. Mosely (2001) found that microfinance is
effective in reducing poverty for those who are close to the
poverty line, but it is not effective in reducing extreme
poverty.
This view of the effectiveness of microfinance in poverty
alleviation has been challenged by Bateman and Change who have
argued that the positive expected impact of microfinance on
poverty is very limited.
“We argue that any positive outcomes are very limited in number and swamped by
much wider longer run downsides and opportunity costs at the community and
national level. Our view is that microfinance actually constitutes a powerful institutional
and political barrier to sustainable economic and social development, and to poverty
reduction. Finally, we suggest that continued support for microfinance cannot be
divorced from its supreme serviceability to the neoliberal/globalization agenda.”
As a result of the shortcomings of the microfinance models that
have been used since the 1970s, new concepts emerged to emphasis
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the importance of the financial aspect in dealing with poverty
alleviation. This concept is known as financial inclusion. The
concept of financial inclusion has been given tremendous
attention recently. Even though there is increasing interest of
international economic institutions, policymakers, and academics
in financial inclusion, there is no unified definition for this
concept, i.e. while Allen, et.al (2012) provides a narrow definition of
financial inclusion by defining it as holding a formal account at
a financial institution. The Center for Financial Inclusion
provides a broader definition for this concept as follows:
“Full financial inclusion is a state in which all people who can use them have access to a
full suite of quality financial services, provided at affordable prices, in a convenient
manner, and with dignity for the clients. Financial services are delivered by a range of
providers, most of them private, and reach everyone who can use them, including
disabled, poor, rural, and other excluded population.”
In this paper, I introduce a new concept for dealing with poverty
through: better access to finance; a better business environment;
and a more comprehensive strategy. I call this concept “Financial
Empowerment” which is defined as the ability of individuals and
SMEs to have access to credit instruments and financial services
such as insurance, savings, and payment at reasonable costs
within a comprehensive government strategy to deal with the
business environment and other challenges that face individuals
and SMEs, i.e. marketing and economies of scale. This concept
fits the situation in Egypt where financial institutions cover
all Egypt; the cost of holding an account at banks are reasonably
9
low; and the documents required to open an account are available
for any citizen. Opening an account at an Egyptian bank only
requires the national number ID. However, the major challenge in
Egypt is getting a loan. For individuals and SMEs to get a loan
in order to start a new business or to extend an existing
business they have to get through a complicated process that ends
in most cases by refusing the loan application. On one hand, bank
loans require collateral and documentation requirements that are
very difficult for individuals and SMEs to meet. On the other
hand, banks prefer to invest in government treasury bills and
other instruments where the associated risks associated are very
low and their returns are high.
(3) The characteristics of banks as credit providers in Egypt:
To enhance the ability of individuals and MSEs in getting the
financial resources and services they need, the Egyptian
government established the Social Fund for Development (SDF), the
Development & Agriculture Credit Bank (DACB), and the Local
Development Fund (LDF). SDF provides finance, marketing, and
capacity building for individuals who want to start their own
business. DACB provides finance for farmers in order to increase
the productivity of their farms or to establish agricultural
projects. It extended its work to finance small business in all
areas. LDF was established at the Ministry of Local Development
in order to provide very low-cost finance to poor farmers.
Moreover, the Egyptian government allows business associations
and NGOs to work in the area of microfinance. Even though the
10
establishment of SDF, DACB, and LDF is very important for
providing finance to individuals and SMEs, their impact on
poverty alleviation and unemployment is very low. This can be
attributed to three main reasons. First, the fact that these three
credit providers do not follow specific business models in
providing their services which have led to channeling most of
their finance into consumption needs not into establishing new
projects or extending existing projects. Second, the absence of a
unified business model used in providing microfinance and related
services for individuals and SMEs that is connected directly to
the national development plan leads to repeating the same
mistakes by all microfinance providers. Also, it leads to
excessive lending for some sectors and activities and minimal
lending to other sectors and activities. Third, Egyptian bank
engagement in providing credit to individuals and SMEs is very
limited compared with the magnitude of finance needed to
alleviate poverty in Egypt. Moreover, resources that are
available in the SDF, DACB, and LDF are not enough to deal with
poverty alleviation in Egypt. The whole financial system in Egypt
must be re-regulated in order to play an active role in providing
finance and other related services for individuals and SMEs.
Demirguc-Kunt and Klapper (2013) differentiate between two types of
financial systems. The first are the well-functioning financial
systems which have a vital role in offering savings, credit,
payment, and risk management products to people with a range of
needs. The second is the more-inclusive financial systems which
11
allow broad access to appropriate financial services. They argued
that the latter are more likely to benefit the poor and other
disadvantaged groups. Providing access to credit and financial
services to these groups of people enhances entrepreneurship and
helps to alleviate poverty.
To investigate the current and the future role of Egyptian banks
in providing finance and other related services to individuals,
the rest of this section is allocated to examining the structure
of banks and their current role as credit providers. The source
of data used in this section is the Central Bank of Egypt (CBE).
As figure (1) shows, while the total number of operating banks in
Egypt was declining over time, the number of branches was
increasing. In 2004, the total number of banks was 61 banks. This
number declined to 39 banks by June 2011 as a result of the
decisions of some foreign banks to end their business in Egypt.
In June 5, 2012, the registration of the Arab International Bank
under the supervision of the Central Bank of Egypt increased the
number of operating banks to 40 banks instead of 39. The number
of operating banks continues to be 40 until the end of June 2013.
The number of branches was 2783 branches in 2004 and increased to
3651 branches by June 2013.
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Figure (1)
Total number of banks and their branches operating in Egypt from2004 to 2013
Figure (2) shows the distribution of the ownership of banks in
Egypt. As this figure shows, the majority of banks in Egypt are
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private banks. However, when we look at the branches of the
banks, figure (3) shows that the majority of branches / banking
units are owned by the public sector. Also we note from figure
(3) that while the number of branches for public banks declined
from 2153 branches in 2004 to 2080 branches in 2010 by a
percentage decrease of 3.3%, the number of branches for private
banks increased from 571 branches to 1329 branches during the
same period with a percentage increase of 133%.
Figure (2)
Number of operating banks in Egypt by the ownership from 2004 to2010
14
2004+ 2005 2006 2007 2008 2009 20100
10
20
30
40
7 7 7 6 6 5 5
35 3429 28 27 27 27
19
117 7 7 7 7
Number of Public Sector Banks Number of Private Sector Banks Number of Private and Joint venture Banks
end of June
no. of banks
Figure (3)
Number of branches by ownership from 2004 to 2010
2004 2005 2006 2007 2008 2009 20100
500
1000
1500
2000
25002153 2185 2222 2074 2089 2088 2080
571 607 674930
1145 1270 1329
59 49 48 52 63 85 93
Number of Branches of Public Sector Banks Number of Branches of Private Sector Banks Number of Branches of Private and Joint venture Banks
end of June
number of branches
There are other indicators for the banking sector that are
connected to the ability of banks to provide services. (1) The
number of village banks in June 2013 was 1016 banks. (2) The
15
numbers of debit cards, credit cards, ATMs, and points of sale
were 12,677,275; 2,100,471; 6,283; and 45,716 respectively.
As figure (4) shows, banking density in Egypt was that of one
banking unit serving 24.9 thousand people. This number decreased
to 22.3 in 2010, before it slightly increased to 22.9 by June
2013. This number is enough to provide banking services for
citizens. However, the problem is not the number of banking
units, rather, the nature of banking operations. Banks in Egypt
prefer to engage in low risk operations, i.e. government treasury
bills & bonds, rather than providing finance to the private
sector, especially small and medium enterprises (SMEs) where the
associated risks are considered very high. Moreover, banks in
Egypt are moving toward the provision of more service and less
credit to the private sector. The main causes are: the high
interest rate and low risks associated with government treasury
bills; the high risk associated with private sector lending—
especially as a result of week credit information; and the modest
qualifications and skills of credit officers in Egyptian banks.
Figure (4)
Banking Density in Egypt from 2004 to 2013
16
2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 321
21.522
22.523
23.524
24.525
25.524.9 24.8
24.524.2
22.9
22.3 22.3 22.5 22.722.9
end of June
Population in thousands per
banking unit
Source of data: the Central Bank of Egypt.
By reviewing figure (5), we can differentiate among three periods
regarding bank preferences of lending to the government versus
the private sector. The first period is before the adoption of the
Economic Reform Program in Egypt. In this period banks were
lending to the government more than to the private sector. As
figure (6) shows, in 1991 bank claims on the government accounted
for 53.5% of domestic credit, while bank claims on the private
sector only accounted for 29.9% of domestic credit. This trend
continued until 1995. One explanation for the high percentage of
bank claims on the government relative to the private sector is
the structure of the ownership of banks in Egypt during this
period. Another explanation is that risks associated with
government credit are lower than those associated with private
sector credit. The second period is from 1995 until 2010. During
this period bank claims on the private sector exceeded the bank
17
claims on the government. Over this period, bank claims on the
private sector exceeded bank claims on the government. As figure
(6) shows, in 2000, bank claims on the private sector accounted
for 56.6% of domestic credit, while bank claims on government
only accounted for 22% of domestic credit. However, after 2000
bank claims on government were increasing by rates higher than
the rate of increase of bank claims on private sector. This can
be attributed to the increasing size of treasury bills that were
issued in order to finance public budget deficit. The third period
starts from 2010. Starting from this year bank claims on
government increased steadily to account for 59.8% of domestic
credit compared with 27.5% for the private sector in June 2013.
As a result of political unrest and economic instability after
the 25th of January 2011, the risk of lending to the private
sector increased which made banks prefer to lend to the
government more than to the private sector. The increasing size
of government treasury bills, their high rate of return, and the
low level of risk associated with them, made government treasury
bills better investment tools than loans to the private sector.
18
Figure (5)
Banks claims on various sectors from 1991 to 2013 (in L.E. mn)
02000004000006000008000001000000
Net claims on Government Claims on public business sector *Claims on private business sectorClaims on household sector
end of June
L.E
mn
Figure (6)
Banks claims on government and private sector from 1991 to 2013
(% of domestic credit)
19
010203040506070
Banks Claims on Governoment Bank Claims on Private Sector Business
end of June
% of
dom
esti
c cr
edit
(4) Assessing the financial empowerment in Egypt:
Financial empowerment goes beyond financial inclusion. Financial
empowerment has two dimensions. The first dimension is financial
inclusion in its broad definition, which implies the ability of
individuals and SMEs to have access to financial resources and
services at a reasonably low cost. The second dimension is the
business environment. A good business environment is a
prerequisite for providing economic opportunity for individuals
and SMEs to manage successful businesses—the right strategy for
poverty alleviation. To assess the current situation of financial
empowerment in Egypt, the rest of this section is allocated to
examining the two dimensions of financial empowerment.
Shanakar (2013) found out that barriers to financial inclusion can
be attributed to the supply side and/or the demand side. For the
20
supply side, physical barriers, lack of suitable products, and
documentation are the main barriers. For the demand side,
psychological & cultural barriers and the lack of financial
literacy were found to be the main barriers. Allen, et.al (2012) found
out that the main reasons for not holding accounts in financial
institutions are: high costs, lack of necessary documentation,
and the long distance from banks. Singh and Yadav (2012) identified
seven reasons for banks to limit their lending to poor people.
These reasons are: irregular income patterns; inadequate credit
information; lack of collateral; illiteracy; high transaction
costs due to small sized loans; psychological & cultural
barriers; and lack of popular knowledge of financial services.
In Egypt, it is very difficult for individuals and SMEs to get
financing from financial institutions. The reason for the low
level of financial inclusion and credit accessibility in Egypt
can be attributed to two sets of factors. First, factors that are
related to the supply side. Second, factors that are related to
the demand side. The factors that are related to the supply side
are: underdeveloped financial structure, i.e. the weakness of
credit information and the lack of a clear framework for non-bank
financial institutions; the legal framework of microfinance;
limited availability and diversity of specialized financial
products and services; high fixed costs; macroeconomic
instability; low population density in some areas; high risk; the
crowding out effects of government tools; high transaction costs;
and the difficulties in managing loans to SMEs. Factors that are
21
related to the demand side are: financial illiteracy; rules and
regulations, i.e. requirements for getting a loan; high fees and
interest rates; the low level of income and savings.
The business environment in Egypt does not provide enough support
for small entrepreneurs and SMEs. One of the main indicators for
the business environment is the “ease of doing business
indicator,” published by the World Bank. According to this
indicator, Egypt ranked 128 among countries regarding the ease of
doing business in 2014. This indicator has ten sub-indicators.
The first sub-indicator is starting a business. According to this
indicator, Egypt in 2014 was ranked 50 among countries. Its rank
in 2013 was 44. Egyptian authorities have taken many steps in
order to make it easier for investors and entrepreneurs to start
business in Egypt. The number of procedures and the numbers of
days to start a business declined from 13 and 37 respectively in
2004 to 7 and 8 respectively in 2014. The second sub-indicator is
dealing with construction permits. According to this indicator,
Egypt ranked 149 among countries in 2014. In 2013, Egypt ranked
144. The Egyptian authorities decreased the number of procedures
and the number of days to finish construction permits from 25 and
211 respectively in 2004 to 21 and 179 respectively in 2014. The
third sub-indicator is getting electricity. According to this
indicator, Egypt was ranked 105 among countries in 2014. Seven
procedures and 54 days are required for a business in order to
get electricity. The fourth sub-indicator is registering property.
According to this indicator, Egypt was ranked 105 among countries
22
in 2014. Even though the number of procedures required to
register a property has not changed from being 8 procedures in
2004 until 2014, the Egyptian authorities have managed to
decrease the number of days required to register a property from
194 in 2004 to 63 in 2014. The fifth sub-indicator is getting credit.
According this indicator, Egypt was ranked 86 among countries in
2014. The sixth sub-indicator is protecting investors. According to
this indicator, Egypt ranked 147 among countries in 2014. The
seventh sub-indicator is paying taxes. According to this indicator,
Egypt was ranked 148 among countries in 2014. The eighth sub-indicator
is trading across borders. According this indicator, Egypt was
ranked 83 among countries in 2014. In this regard, the number of
days for exporting declined from 27 in 2005 to 12 in 2014. The
ninth sub-indicator is enforcing contracts. According to this
indicator, Egypt was ranked 156 among countries in 2014. The tenth
sub-indicator is resolving insolvency. According to this indicator,
Egypt was ranked 146 among countries in 2014. Table (2)
summarizes the performance of Egypt according to the ease of
doing a business indicator and its sub-indicators. We conclude
from this table that the legislative framework for business must
be changed in order to encourage investors to establish new
business. This is very important issue in the process of
enhancing financial empowerment as a strategy to alleviate
poverty in Egypt.
Table (2)
Ease of doing business in Egypt
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Indicator RankEase of doing business 128Starting a business 50Dealing with construction permits 149Getting electricity 105Registering a property 105Getting credit 86Protecting investors 147Paying taxes 148Trading across borders 83Enforcing contracts 156Resolving insolvency 146The source: Doing business indicator, the World Bank.
Besides the factors mentioned above, SMEs face major challenges
that affect negatively the number of established SMEs in Egypt
which has a negative impact on poverty alleviation. The first major
challenge that SMEs face is the high interest margin. While the
average interest rate on deposit during the last decade was
around 10%, banks and other credit providers lend to SMEs at
interest rates that exceed, in most cases, 20%. The high interest
margin can be attributed to the high risk levels that are
associated with loans to SMEs and the high level of transaction
costs of these loans. Poghosyan (2012) provides explanations for
the high level of interest margins in low-income countries. The
high interest margins is one of the main reasons for a low level
of banks’ loans to SMEs. According to the Global Financial
24
Development Report published by the World Bank, only 5.1% of
small firms in Egypt held bank loans or bank lines of credit in
2009. Barajas, et.al (2013) attributes the limited access of SMEs
to credit in some financial systems to two main reasons. First,
economies of scale at all levels lead to high transaction costs
in providing credit to SMEs. Second, high default risks. They
distinguished between two types of default risks. (1) Contract
specific / idiosyncratic risks such as agency frictions arising
from asymmetric information between debtors and creditors; the
high cost of contract enforcement; and limits to the possibility
of diversifying risks. (2) Systemic risks such as non-
diversifiablity that affects all financial contracts and the
ability of financial institutions to manage idiosyncratic risks.
(5) A business model for financial empowerment as a tool for
poverty alleviation in Egypt:
The most common model of microfinance is the Grameen Bank model
that has been used in Bangladesh and other countries. The main
characteristics of this model are: (1) It is a non-profit
oriented model. (2) Credit for beneficiaries is provided by
forming groups that consist of members that will be collectively
responsible for paying back loans that are given to all members
in the group to which they belong. (3) It allows the microfinance
institutions to receive deposits. The other well-known model of
microfinance is the Self-Help Groups (SHGs) that have been used
in India and many other countries in Asia and Latin America. What
differentiates the SHGs model from the Grameen model are: (1)
25
SHGs follow a profit oriented model. (2) It does not allow
microfinance institutions to receive deposits. Ghosh (2013) has
provided a detailed review of literature that has dealt with the
microfinance topic. This review concluded that the current
microfinance models suffer from major shortcomings and do not
lead to poverty reduction in the communities in which they work.
As a matter of fact, instead of increasing income-generating
activities for the poor and supporting their financial situation,
they have led to an increase in financial vulnerability of the
poor.
In this section, I will develop a business model for financial
empowerment as a tool for poverty alleviation in Egypt.
Developing a business model that enhances financial empowerment
in Egypt, as defined in this paper, requires providing a clear
answer for the following questions: What services should be
provided? How should these services be provided? Who provides
these services? To whom should these services be directed?
First question: What services should be provided?
Based on the current situation of financial inclusion and the
main challenges that face individuals and SMEs in Egypt, the
proposed model suggests that four services be provided to
targeted people. These services are credit instruments,
insurance, marketing, and capacity building. Beside these
services, the proposed model enhances the business environment
for people who want to start their own businesses; it coordinates
26
among them in order to achieve economies of scale; it solves the
problem of a replication of successful business; and it deals
with the obstacle of centralization by making the local
government take the lead in project supervision.
Second question: How should services be provided?
In order to benefit from economies of scale to reduce transaction
costs and to reduce the marginal cost of production, the proposed
model encourages the provision of credits for small or medium
enterprises that formed from targeted people. These people are
supposed to work for firms where all the value is added by people
within the target area. In this way, people in the firm are going
to watch over each other’s behavior to prevent misuse of credit.
Simply said, the firms have a self-supervision mechanism. Beside
the above rationale, forming small and medium firms for targeted
people has the following benefits: (1) It allows for the
provision of other services, insurance, marketing and capacity
building. These services are very costly to be provided for
individuals. (2) It solves the dilemma of microfinance in Egypt
where people obtained loans to finance business but instead
financed personal consumption needs. This happens in most of
cases in Egypt and, in most cases, the creditors know of this
abuse in advance. However, they approved the loans either to
achieve their targets or because of personal connections between
credit officers and the borrowers. Many of these fake projects
lead to insolvency and put pressures the government to write off
these loans. (3) It encourages entrepreneurship. A government
27
entity in every area provides support in getting easier access to
all documentation and permits. (4) It allows for the best use of
central government resources within a decentralized framework.
(5) It deals with the informal sector problem in Egypt. Forming
such firms attracts people who work in the informal sector to
join the formal economy.
Third question: Who provides these services?
This model proposed a joint private-public provision of suggested
financial services. On one hand, depending on markets to provide
these services faces the possibility of market failure in
financial markets. These failures are because of: insufficient
collateral; lack of credit history information; and incomplete
markets or not deep enough markets. On the other hand, depending
only on government to provide such services leads to the
following problems: (1) Distortionary, excessive or otherwise
improperly designed interventions that may be generated by
bureaucratic incentives. (2) Prevalent inefficiencies, including
politically connected lending. (3) Beneficiaries may exercise
organized political pressure aimed at the change of signed credit
contracts, Ratnovski and Narain (2007).
In this business model for financial empowerment, the major role
of the government is not limited to providing credit to
individuals and SMEs. Private financial institutions, business
associations, and NGOs should be encouraged or pushed to take the
lead in this function. For government institutions that provide
28
credits for individuals and SMEs, i.e. SDF, DACB, and LDF, these
institutions cover all villages and remote areas and they have a
direct contact with poor people and small entrepreneurs. In order
for these institutions to do their job more efficiently, they
have to be restructured. For instance, DACB has branches that
cover all Egyptian villages. However, it lacks financial
technology, skilled people, and a clear vision that is needed in
order for it to play a vital role in credit accessibility and
poverty alleviation in rural areas. The role of government in
this model is the following: (1) Designing and implementing a
strategic plan for poverty alleviation that is built on financial
inclusion and enhancement of credit accessibility. (2)
Coordinating and supervising the role of all stakeholders of this
plan. (3) Granting loans that are provided by private financial
institutions to firms that participate in this program. (4)
Enhancing the business environment by improving the ranking on
the indicator of doing business in Egypt and its sub-indicators.
This means that according to the proposed model for financial
empowerment, the Egyptian government must have a strong
commitment to increase financial inclusion and credit
accessibility for individuals and SMEs. This commitment makes the
government adopt a proactive approach in addressing policy and
regulatory issues; gathering and publishing data regarding
financial inclusion and credit accessibility; enhancing financial
literacy; and improving the environment of doing business in
Egypt for SMEs. Chowdhury (2009) have emphasized the role of
29
government in supporting poverty alleviation through establishing
state-owned financial institutions that provide credit for
individuals and SMEs. G20 (2010) provides a comprehensive review
of the role of governments in financial inclusion in many
developing countries across the world.
In order to enhance financial empowerment as a tool for poverty
alleviation, the Egyptian government must improve the business
environment by making it easier to do business in Egypt. This
requires the following steps: (1) Easing the process of starting
business by decreasing the number of procedures, documents, and
days that are required to start business. All procedures should
be decentralized. (2) Dealing with construction permits is an
area which government must revisit. As mentioned above, the
second worst performance for Egypt in the ease of doing business
indicator is its performance in dealing with construction
permits. New laws and regulations are needed in order to make
getting construction permits less of an obstacle in starting
business. (3) Enforcing contracts is the worst performance in the
indicator of the ease of doing business in Egypt, as mentioned
above. In order to improve the business environment, the Egyptian
government must change the judicial system to make enforcement of
contracts faster and less costly and to provide the necessary
protection for investors. (4) Registering a property is one area
where the government of Egypt must make processes easier. Many
individuals have properties that can be used as collateral for
loans. However, they cannot use them because of the difficult and
30
long procedures in order to register property. Dealing with this
problem will allow many individuals to get access to credit for
financing their businesses. (5) Fighting corruption is one area
in which the government must work very hard. Corruption hurts
entrepreneurs, especially the small ones, and put constraints on
them in getting started with business and getting the financing
that is needed.
Fourth question: To whom should these services be directed?
According to the financial empowerment business model for poverty
alleviation that is suggested in this paper, two main groups of
beneficiaries are targeted. The first group of beneficiaries are
people who have skills in producing a specific product, however
they cannot start their own businesses because of their inability
to get financing or their inability to complete the procedures of
starting a business. In this case, local governments should adopt
project under which these groups of people can start their own
business with the support of local government. Local government
can mobilize the needed finance and overcome the obstacles that
face small entrepreneurs in starting their businesses. Another
advantage of doing so is making sure that the new businesses are
not exceeding market capacity which has led to the failure of
many small businesses in Egypt over the last two decades. The
second group of beneficiaries are SMEs. According to the financial
empowerment model for poverty alleviation, local governments must
group all SMEs producing the same products or produce
complementary products together under the umbrella of projects
31
that are supported by the government. Government in this case co-
ordinates with credit providers and these groups of SMEs under
supported projects in order to provide low cost financing and
financial services. Local governments may even need to grant
loans for these SMEs under the supported projects. This model
enables the local government to provide capacity building
activities for the supported projects and to benefit from the
central government resources that are available for supporting
business.
The proposed model has many advantages. First, it insures the
coordination among all government units that deal with
microfinance, credit accessibility, and poverty allocation at all
levels. This is a very important issue in Egypt given its heavily
centralized system. Second, it emphasizes the crucial role of
scale economies by getting many of the small production units
together to work under the umbrella of a large project. Thus, it
also deals with the problem that is responsible for the failure
of many small projects, that microenterprises have the tendency
to replicate successful activities which ends up by collapsing
both new and old projects. Third, it allows microenterprises to
connect with each other, allowing for synergies to develop in
productive activities. Fourth, it emphasizes local community
ownership and control. Fifth, it solves the problem of collateral
which faces the SMEs in getting credits. Sixth, it targets people
who have a high propensity to start a new business. Thus, it
deals with a major problem that faces the microfinance providers
32
which is that poor people in most of the cases use financing to
increase their spending on consumption goods, particularly non-
durables such as food. This behavior has made the role of
microfinance in generating income very low. Instead, it worsened
the financial situation for poor people who used microfinance
tools. For instance, the DACB was forced to write off credit that
it provided to poor farmers. Seventh, it deals with the problem of
the duplication of providing credits from different microcredit
providers. Eighth, it leads to a better usage of local resources
that can be sued as bases for new businesses.
In the appendix, I will discuss the application of this model on
the home furniture sector in the city of Tahta, Sohag, Egypt.
(6) Conclusion and policy recommendations.
As a result of the shortcoming that the business models used in
microfinance suffer from and their limited impacts on reducing
poverty, developing a new business model for microfinance is a
very important issue in the field of economic development and for
policy making that target poverty alleviation. What was missing
in the previous business models that all of them concentrate on
financial inclusion or/and credit accessibility and they ignore
33
other aspects such as: institutional capacity and business
environment.
In this paper, I developed a business model for financial
empowerment as a tool for poverty alleviation in Egypt.
Developing a business model that enhances financial empowerment
in Egypt, as defined in this paper, requires providing a clear
answer for the following questions: What services should be
provided? How should these services be provided? Who provides
these services? To whom should these services be directed?
The proposed business model include four main aspects: financial
inclusion; credit accessibility; enhancing institutional capacity
in designing a comprehensive strategy for poverty alleviation;
and improving business environment. The main policy
recommendation for policy makers in Egypt is to implement this
model in all governorates.
34
References:
Allen, F., A. Demirguc-Kunt, L. Klapper, M. Peria (2012). “The
Foundations of Financial Inclusion: Understanding the Ownership
and Use of Formal Accounts.” The World Bank, Policy Research Working Paper,
WPS 6290.
Baragas, A., T. Beck, E. Dabla-Norris, and S. Yousefi (2013).
“Too Cold, Too Hot, Or Just Right? Financial Sector Development
Across the Globe.” IMF Working Paper, WP/13/81.
Bateman, M. and H.-J. Chang (2012). “Microfinance and the
illusion of development: from hubris to nemesis in their years.”
World Economic Review, Vol.1, 13-36.
Chowdhury, A. (2009). “Microfinance as a Poverty Reduction Tool –
A Critical Assessment.” United Nation, Department of Economic & Social
Affairs, DESA Working Paper No. 89.
Demirguc-Kunt, A. and L. Klapper (2013). “Measuring Financial
Inclusion: Explaining Variation in Use of Financial Services
across and Within Countries.” Brookings Papers on Economic Activity.
Duvendack, M., R. Palmer-Jones, J.G. Copestake, L. Hooper, Y.
Loke, and N. Rao (2011). “What is the evidence of the impact of
the microfinance on the well-being of poor people?” EPPI-Center,
Social Science Research Unit, Institute of Education, University of London.
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Ghosh, J. (2013). “Microfinance and the challenge of financial
inclusion for development.” Cambridge Journal of Economics.
G20 (2010). “Innovative Financial Inclusion.” G20 financial inclusion
experts group.
Mosely, P. (2001). “Microfinance and Poverty in Bolivia.” The
Journal of Development Studies, vol. 37.pp101-132.
Poghosyan, T. (2012). “Financial Intermediation Costs in Low-
Income Countries: The Role of Regulatory, Institutional, and
Macroeconomic Factors.” IMF Working Papers, WP/12/140.
Ratnovski, L. and A. Narain (2007). “Public Financial
Institutions in Developed Countries-Organization and Oversight.”
IMF Working Paper, WP/07/227.
Shankar, S. (2013). “Financial Inclusion in India: Do
Microfinance Institutions Address Access Barriers? ACRN Journal of
Entrepreneurship Prospectives, Vol.2 no.2, pp 60-74.
Shetty, N. (2005). “The Microfinance Promise in Financial
Inclusion and Welfare of the Poor: Evidence from India.” Center for
Economic Studies and Policy.
Singh, J. and P. Yadav (2012). “Micro Finance As A Tool For
Financial Inclusion & Reduction Of Poverty.” Journal of Business
Management & Social Sciences Research, Vol. 1 no.1.
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Appendix A case study for implemented the proposed business model.
This model was implemented in the governorate of Sohag in Egypt.
Sohag is one of the poorest governorates in Egypt. With 43 % of
37
its population under the poverty line, Sohag is ranked as the
second poorest governorate among all governorates of Egypt, after
Assiut. The idea started when the governor of Sohag, Gen.
Elnoumany, decided to work on poverty alleviation and improving
the economic conditions for the people of Sohag. With all
stakeholders, we developed a comprehensive strategy to enhance
economic growth and development in Sohag. One dimension of this
strategy is to make use of financial resources that are available
at financial institutions and the central government in reducing
poverty and enhancing economic growth & development in Sohag. In
order to encourage our partners, we have to provide visible and
profitable project proposals that meet the objectives of all
stakeholders. We start our mission by identifying all connected
small businesses that suffer from financial and other problems.
At the same time there is a large number of people who are
willing to start their own businesses in this area if they could
obtain financing. The first experimental case for the model is
establishing an industrial compound for home furniture products
in Tahta. Tahta has around 370 home furniture products workshops.
In this city, there is a large number of people with very high
skills in this business. The problem was that most of these
workshops are very small, only 15m2; they have financial
difficulties; they have problems in marketing their products; and
even most of them do not have licenses and permits. The
authorities used to close some of these workshops from time to
time. After holding several meetings with the owners of these
38
workshops and with financial institutions, we developed a plan to
transfer these businesses from very small and informal workshops
to a medium size industry. A protocol among the Sohag
governorate, SDF, the General Authority for Industrial
Development, the Ministry of Local development, and the Ministry
of Industry & Trade was signed. According to this protocol, the
governorate of Sohag provides the land for this project and
coordinates among targeted people and all other stakeholders. The
General Authority for Industrial Development is responsible for
the infrastructure of this project, i.e. roads, electricity, and
water. The Ministry of Industry & Trade finances a training
institute for this project. The Ministry of Local Development
coordinates among all central government entities that are
involved in this project. The SDF finances the buildings and the
equipment. It is also responsible for stimulating marketing for
the products. The infrastructure for the project is expected to
be finished by the end of 2014. The number of units to be built
is 1200 units in three models. The first model is for units with
a size of 250 m2. The second model is for units 400 m2. The third
model is for units 600 m2 or more. The beneficiaries will pay
back the cost of the new units to the SDF over a long period of
time at a very low interest rate. The expected outcomes of this
project are: (1) it is expected to create 8500 job opportunities
for poor, but skilled people. (2) Transferring 370 small,
informal, and inefficient workshops to small & medium and formal
manufacturing businesses and establishing 830 new businesses that
39
would otherwise have not gotten financing. The lessons learned
from this project are: (1) Poor people and small business can
benefit from the financial resources that are available from
central government programs for industrial development. (2)
Coordination among all governmental units at all levels ease the
doing of business for poor people and young entrepreneurs. (3)
Financial institutions are willing to provide credit for poor
people and for SMEs if it is granted that they will get their
money back. Once this project is finished and proves successful,
it will be replicated in the other 49 areas with similar activity
as that of the poor Sohag cities and villages.
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