In a country where 27.8% of the population lives below the poverty line, according to CAPMAS statistics, micro financing can play a crucial role in improving the standard of living and providing a means for development. Egypt’s primary objective since the economic damage that the country suffered following two revolutions has been to increase foreign direct investment. This is a top-down strategy that prioritizes both state-owned businesses and large private sector enterprises, under the assumption that as Egypt enjoys more access to capital and resources, it will be able to spend money to improve the living conditions of the less fortunate.
Still, as a short-term solution is necessary, the Central Bank of Egypt (CBE) has turned to micro financing. In May, the CBE, in a partnership with the Egyptian Financial Supervisory Authority (EFSA), the Egyptian Micro-finance Federation and eight Egyptian banks, decided to provide EGP30 billion (US$1.7 billion) in micro financing over a four-year period.
This new climate for micro financing has inspired NI Capital, a public investment bank, to create a EGP50 million (US$2.83 million) micro financing program, Tamweely, which will focus primarily on low-income borrowers in the rural areas of Upper Egypt and the Nile Delta, which suffer from higher poverty rates.
Considering that Shariah compliant financing often suffers from state indifference, the government’s interest in micro financing could provide an opportunity for Islamic financial institutions to create a Shariah compliant micro financing initiative that could complement the CBE project and smaller initiatives such as Tamweely, rather than compete with them.
One of the drawbacks of micro financing is the high interest rates, which lenders consider necessary when the clients lack sufficient amounts of collateral to qualify for traditional bank loans. The Qard Hasan (benevolent loan) is a form of Islamic micro financing that targets low-income individuals as well; however, unlike conventional micro financing, the borrower must only pay back the actual value of the financing. Many Shariah compliant banks in Egypt, such as the Faisal Islamic Bank (FIB), offer Qard Hasan financing out of the banks’ Zakat funds. It should be noted that the FIB was the only fully Shariah compliant bank included in the CBE initiative.
Still, rather than participating in an already existing initiative geared toward conventional micro financing, Shariah compliant banks could create a unified Qard Hasan program that would be administrated by both fully compliant banks and the Shariah compliant windows of conventional banks.
If the CBE and EFSA approved the program, it could create a wider funding base in addition to Zakat funds. It would also allow the program to cater to a certain tier of society, the most vulnerable of the disadvantaged, who would be unable to pay the interest rates even on micro financing loans. The result would be a net economic benefit to Egypt and its most marginalized segment of society, while raising the profile of Shariah compliant financing.
By: Dr Walid Hegazy
This report was first published in Islamic Finance News dated the 27th September 2017.