Non-bank financial activities are gaining momentum and demonstrating resilience despite the hurdles they face, including high interest rates and an inflationary environment. Expectations suggest a positive growth trajectory with maintained growth rates throughout the current year.
Companies in the non-banking financial sector primarily rely on bank borrowing to finance their operations, making them susceptible to interest rates determined by the Central Bank, along with profit margins.
In March, the Monetary Policy Committee of the Central Bank of Egypt decided to raise the central bank’s main operation price by 200 basis points to 18.75%. Additionally, the credit and discount rate were raised by 2% to reach 18.75%. These decisions followed eight interest rate hikes in 2022.
Experts unanimously agree that the non-banking financial activities sector is one of the most successful in capitalizing on crises and achieving high growth rates. The sector supports diverse financing alternatives for companies, allowing them to accomplish their objectives and attract domestic and foreign investments.
Daily News Egypt conducted a survey to gather expert insights on growth rate expectations across all non-banking financial activities.
Microfinance: A 40% growth projection
Ahmad Al-Khatib, CEO of Abu Dhabi Islamic Bank, acknowledged the impact of rising interest rates on microfinance and other non-banking financial activities. However, he emphasized the sector’s positive growth expectations.
Al-Khatib stated that microfinance continues to maintain an average annual growth rate of 40%, with indications pointing towards similar growth in the current year. Given the smaller scale of borrowing activities in microfinance, they are more susceptible to interest rate fluctuations. Consequently, these companies require financing to sustain operations, procure raw materials, and obtain operational tools.
To further support micro-projects, the Financial Regulatory Authority (FRA) raised the maximum financing limit for companies, associations, and civil institutions from EGP 200,000 to EGP 220,000.
Medium, small, and micro enterprises received financing amounting to EGP 42 billion by the end of February 2023, compared to approximately EGP 29 billion in February 2022. The number of beneficiaries reached 4 million.
Financial leasing activity faces challenges
Mohamed El-Feki, co-founder of the Sympl platform specializing in “buy now and pay later” services, highlighted the double-edged impact of rising interest rates. While companies experience declining profit margins, interest rates vary depending on each company’s policies. Some companies experience rate increases at the same level as banks, while others face lower rates.
El-Feki attributed high default rates to customers’ inability to meet installment payments, particularly as some companies reduce costs by laying off workers or cutting incentives. However, he stressed that inflation has not affected essential commodities.
Financial leasing activity witnessed a decline of 15.1% in the number of leasing contracts during the fourth quarter of 2022 compared to the same period in 2021. However, the value of contracts increased to approximately EGP 23.2 billion, reflecting a growth rate of 7.48%.
Real estate and land activities accounted for the majority of financial leasing contracts, representing 84.06% of the total value, while transport vehicles and heavy equipment followed.
Limited growth potential
Ayman Abu Hind, investment manager at Carter Capital, anticipates moderate growth for non-bank financing companies due to high interest rates, which increase operational costs. Abu Hind believes that growth will likely be limited to 2% to 3% considering the challenges posed by interest rates, inflation, and banking legislation. He also mentioned that high default rates restrict growth to a maximum of 4%.
Insurance company officials anticipate that the recent interest rate hikes by the Central Bank will lead to increased investment returns for insurance companies. Abdulaziz Labib, Deputy Managing Director of Wethaq Takaful Insurance, explained that the higher interest rates on bank deposits will boost investment returns for insurance companies, as a significant portion of their portfolios is directed towards bonds and treasury bills.
Labib further noted that the recent regulations issued by the Financial Regulatory Authority (FRA) regarding insurance companies’ contracts with portfolio management firms and investment funds will enhance the value of investment returns in the market. The new amendments grant insurance companies more flexibility in choosing investment managers licensed by the FRA, provided they meet certain criteria and have a proven track record.
Mohamed Nagah, Deputy Director of Investment and Banking at GIG Insurance – Egypt, predicted that the successive interest rate increases would result in a parallel growth of investment returns for insurance companies, ranging between 2% and 3%. He emphasized that GIG Insurance diversifies its investment portfolio across various short, medium, and long-term investment vehicles to ensure optimal returns while prioritizing the safety of policyholders’ funds.
Non-bank financial activities continue to shine despite challenges such as high interest rates and an inflationary environment. Microfinance shows promising growth, while financial leasing faces obstacles. However, insurance companies expect increased investment returns due to the recent interest rate hikes and favorable FRA regulations.
