The Central Bank of Egypt (CBE) issued new rules this month for registering and delivering licences, along with administration and surveillance of digital banks. Recently, the digital banking sector in Egypt took a massive step towards providing access to customers to transact through their bank accounts 24X7 from all across the globe. The CBE ruling will now pave the way forward for Egypt’s banking digitalisation of the economy.
As per the Bank for International Settlement (BIS), digital banks are institutions that accept deposits and are a member of deposit insurance, delivering banking services via electronic means rather than offline offices. Digital banks should not be understood as just a mode of online banking.
These are online financial institutions that provide virtual access to banking facilities, like payments and friendly transactions, in a digitalised mode. They require no human interference in their round-the-clock digital banking operations.
After the covid pandemic, digital banking has become part of our daily lifestyle and turned into a requirement. Customers prefer to transact on online mediums rather than spend time in queues for physical bank transactions.
Licensing Procedure and Investments
Digital banks have the potential to improve economic activity in a country. After analysing data, CBE introduced a new banking law and decided to roll out a digital bank licensing scheme in September 2020. On the 12th of July, CBE announced a pathway for obtaining a digital banking licence for institutions and banks in Egypt.
CBE has issued a list of requirements to be met prior to obtaining a licence. A specific capital requirement, administration, and risk control were some primary conditions to be met. As per CBE requirements, digital banks need to have an issued and paid-up capital of a minimum of EGP 2 billion and a capital requirement of EGP 4 billion in financing for big corporations. CBE declared that the majority stakeholder should be a financial institution with a minimum holding of not less than 30% of the total capital and should have some experience in this field.
To date, five of the Egyptian banks and financial institutions have shown interest in digital banking. Companies like Fawry and eFinance have displayed a willingness to invest in the digital banking sector. But, Egypt needs overseas investment and partnership with domestic Egyptian financial institutions as the capital requirement is relatively smaller in comparison to the exchange rate.
Opportunities & Challenges
Mostafa Taher, Senior SMEs Relationship Manager, said that this could be a game changer for investments in the digital banking space. Overseas investors have a broad range of consumer base ranging from 16 and above. Of this huge customer base of above 16 people, 60% of them have their bank accounts in their native country, and surprisingly more than 40% don’t have proper access. This depicts that there is a gap of 40% that can be attracted new consumers.
Taher also highlighted some of the possible challenges, primarily the lack of digital infrastructure. Egypt has been tirelessly working to develop the digital space for banking services. They are also enhancing internet services to increase the availability of high-speed internet throughout the day.
The Ministry of Telecommunication has started the work of optic fibre lines and is working to develop the Tiba satellite to provide internet access to remote border areas and some government offices located in far-off villages. Egypt needs an unbreaking internet in order to roll out digital banking in a full-fledged manner. The ministry has significantly improved internet services since 2015 but still has a long way ahead.
Artificial Intelligence had been brought in to assess the eligibility of a borrower when provided with sufficient data as input. Credit rating is an integral part of the banking ecosystem. Rich nations that follow credit rating sources, like the United States and China, have made credit scores an inevitable part of a person’s life. The authorities have intertwined them with almost everything.
Taher said that Egypt has a system of I-Score which is essential to ascertain the borrower’s eligibility based on their previous loan profile. A catch here is what if this is the first time they are borrowing. This gap can be sealed by interlinking the credit rating system with a number of activities, like taxes and bill payments for shopping, utilities, electricity, fuel, etc.
CBE’s decision to license digital banks with certain requirements like capital, risk management, technological expertise and much more is a step forward for transitioning into a cashless economy. Such online banking applications or servers will provide a plethora of services, especially providing round the clock banking services from any corner of the world.