Despite the challenges facing non-bank financial activities, such as high interest rates and the inflationary environment, expectations indicate a bright increase while maintaining the same growth rates during the current year.
Companies operating in the non-banking financial sector rely mainly on borrowing from banks to finance their financial operations, and are affected by the interest rates set by the Central Bank, other than profit margins.
The Monetary Policy Committee of the Central Bank of Egypt decided, last March, to raise the price of the main operation of the central bank by 200 basis points, to reach 18.75%, and it was also decided to raise the credit and discount rate by 2%, to reach 18.75%, after 8 times of raising interest rates throughout 2022.
The experts unanimously agreed that the non-banking financial activities sector is one of the most successful sectors in benefiting from crises and achieving high growth rates, by supporting the diversity of financing alternatives for companies and their ability to achieve their goals, in addition to the sector’s ability to attract more domestic and foreign investments.
Daily News Egypt surveyed experts on expectations of growth rates in all non-banking financial activities.
40% growth in microfinance
Ahmad Al-Khatib, CEO of Abu Dhabi Islamic Bank, said that the microfinance sector was affected by the rise in interest rates, like all non-banking financial activities, but the growth expectations for the sector are still positive.
Regarding the expectations for the growth of activity, Al-Khatib stated that microfinance still maintains its average annual growth rates at 40%, and it is likely that growth during the current year will proceed in the same context.
He pointed out that the borrowing activities are small in size, which makes them vulnerable to the impact of interest rates, and that these companies need financing to maintain the continuity of their activities and meet their needs for raw materials and operational tools.
Al-Khatib explained that the impact will be less severe on microfinance activity because of the short-term activity business cycle, in addition to the companies operating in the sector pass the same increase in interest rates.
The Financial Regulatory Authority (FRA) raised the maximum limit for financing from companies, associations and civil institutions to finance micro-projects by 10%, to EGP 220,000, instead of EGP 200,000 currently.
The value of financing for medium, small and micro enterprises amounted to EGP 42bn at the end of February 2023, compared to about EGP 29bn at the end of February 2022, and the number of beneficiaries reached 4 million.
The companies came to the throne in financing balances with a market share of 60.5% in the fourth quarter of 2022, and the second in the number of beneficiary clients with a market share of 44%, to record a financing value of EGP 23.4bn and 1.7 million beneficiaries.
Associations and NGOs ranked second in terms of the value of financing balances, recording EGP 13.7bn, with a market share of 35.4%, and the first in terms of the number of beneficiaries, with a market share of 49.7%.
Commercial activity continued to acquire the lion’s share of activities, with a market share of 60%, the value of financing balances amounting to EGP 23.1bn, and the number of beneficiaries amounting to 2.5 million beneficiaries in the fourth quarter of 2022, compared to the value of financing balances amounting to EGP 16.5bn in the corresponding period of 2021, with a growth rate of 40. %, and the number of beneficiaries amounted to 2.3 million.
The service activity ranked first in terms of the growth rate, which amounted to 49.4% in the fourth quarter of the previous year, with a financing value of EGP 3.4m, compared to EGP 1.3m, and the number of beneficiaries about 4,700 customers.
Double-edged sword
Mohamed El-Feki, co-founder of Sympl platform, which specializes in “buy now and pay later” services, explained that the rise in interest rates is a double-edged sword.
He pointed to the decline in profit margins in companies, and to the increase in interest by companies, but at different rates depending on the policy followed by the company itself, so the interest in some companies increased at the same rate as the banks and others at lower rates.
He attributed the high default rates to the inability to keep pace with customers to cover the instalments, especially since some companies laid off some workers to reduce costs and others reduced incentives, while stressing that inflation did not affect basic commodities.
The growth process of some activities such as the financial leasing activity was affected, the number of financial leasing contracts decreased by 15.1% during the fourth quarter of 2022, compared to the fourth quarter of 2021, despite its development by about 188% in 16 years.
The value of contracts increased to about EGP 23.2bn, compared to EGP 21.6bn during the same period of the previous year, with an increase rate of 7.48%.
The real estate and land activity continued to acquire the lion’s share of the value of financial leasing contracts, at a value of about EGP 19.5bn, or 84.06%, of the total value of contracts; due to the growth of the size of this sector compared to other sectors.
The activity of transport vehicles occupied the second place in the ranking, with its acquisition of 4.19% of the total value of contracts, at an estimated value of EGP 1bn, while the activity of heavy equipment came in the third place, with a value of contracts amounting to about EGP 9bn, or 3.9% of the total value of contracts during the fourth quarter of the previous year.
Limited growth
Ayman Abu Hind, investment manager at Carter Capital, expects the growth of non-bank financing companies as a result of the high demand from individuals, with growth to be limited between 2% and 3% due to the high interest rates leading to higher costs for companies.
He explained that the challenges are accumulating for companies, starting with interest and high inflation, in addition to banking legislation, and he indicated that the high default rates are the same as the possibility of a growth of a maximum of 4%. Factoring activity grew during the last quarter of 2022 by 35.9%, bringing the balance of receivable accounts and purchased commercial paper to about EGP 14.3bn at the end of December 2022, compared to about EGP 10.5bn at the end of December 2021.
The volume of debit balances grew from EGP 10.5bn to EGP 14.2bn, while the number of clients increased to 543 clients, a growth of 24.3%.
The total volume of discounted securities increased by 41%, to EGP 10.3bn from EGP 7.3bn, and the volume of discounted securities without the right of recourse increased by 44.8%.
The number of consumer financing clients jumped from 410 clients to 765.2 thousand clients in the last quarter of the previous year, compared to the corresponding period, with a growth rate of 86.6%, while the total financing value grew to EGP 8.7bn in the fourth quarter of 2022, compared to EGP 5.6bn, with a growth rate of 55.9%.
Electric appliances and electronics accounted for the largest share of the financing value, at 38.2%, with financing value amounting to EGP 3.3bn of the total financing value granted.
In the second place came the purchase of cars and vehicles, with its acquisition of 26.1% of the total value of financing, with financing value amounting to EGP 2.2bn.
The volume of real estate financing activity decreased after the decrease in the number of new investors in activity in the fourth quarter of 2022, by a decline rate of 44.1%, to reach 1111 clients, compared to 1988 in the comparative period of 2021, while the value of the granted financing decreased from EGP 2.6bn to EGP 1.9bn, a decrease of 25.1%.
Officials in insurance companies expected that the successive decisions of the Central Bank to raise the interest rate on deposit and lending returns would lead to an increase in rates on investment returns for companies in banks during the coming period.
FRA regulations for insurance
Abdulaziz Labib, Deputy Managing Director of Wethaq Takaful Insurance, said that the interest rate increases in the recent period would positively affect the investment returns of the insurance companies’ investment portfolios. Labib added that the Central Bank’s raising of the interest on deposits in banks will cause a boom in the returns of investments of insurance companies, most of which are directed to banks through bonds and treasury bills.
In the same context, Labib indicated that the recent regulations issued by the FRA for insurance companies contracting with portfolio management companies and investment funds would increase the value of the returns achieved on the investments of insurance companies operating in the market during the coming period.
Last month, the Board of Directors of the FRA issued Decision No. 3 of 2023 regarding the development of rules for insurance companies to contract with companies to form and manage portfolios or manage investment funds, or both, for the purpose of managing their investment portfolios.
The new amendments give insurance companies flexibility in contracting with investment managers licensed by the authority, according to several controls, the most important of which is that these companies have practiced the activity for at least 5 years, and that the average value of the portfolios they manage is not less than EGP 2bn in the year preceding their contract with the insurance company, after excluding the value of the portfolio or funds transferred to it from the insurance company, provided that the value of the portfolio entrusted with its management does not exceed 50% of the value of the portfolios with the investment manager.
Mohamed Nagah, Deputy Director of Investment and Banking at GIG Insurance – Egypt, expected that successive interest rate increases would lead to a parallel growth in returns on insurance companies’ investments, at a rate ranging between 2% and 3%.
He added that the largest percentage of the portfolios of insurance companies in banks is directed to bonds and treasury bills, and therefore it is logical that the increase in interest rates is reflected in the returns from those investments in proportions similar to the increase in the interest rate.
He noted that GIG diversifies its investment portfolio between a number of short, medium and long-term investment vehicles to ensure the highest possible returns while achieving the element of safety, since the invested funds belong to the rights of policyholders in the first place.
“The company seeks to seize the best opportunities in the specified investment channels, in accordance with the controls specified in the executive regulations of the Supervision and Control Law No. 10 of 1981,” he added.
