Financing Egypt’s "Missing Middle"

This post is co-authored by Becky Allen, a research associate in the Women and Foreign Policy program at the Council on Foreign Relations.

The Central Bank of Egypt (CBE) recently launched an initiative that will dedicate approximately $1.6 billion to fund the country's microfinance industry. The new program is part of CBE's broader financial inclusion strategy, which seeks to put new financial tools in the hands of those who are unbanked or underserved – especially women and young people.

In Egypt, 52 percent of the population is under age twenty-five and 86 percent of people live without access to quality financial services, including savings accounts, insurance, and credit. But micro-finance — proven to be an effective tool in reaching some of the world's poorest — is just the start. And focusing exclusively on the microfinance sector leaves out a critical segment of the global population: the "missing middle."

The "missing middle" is made up of small- and medium-sized enterprises (SMEs) in developing nations. Despite serving as the primary drivers of job creation and economic growth in emerging markets and developed economies alike, the International Finance Corporation (IFC) estimates that 55 to 68 percent of formal SMEs in developing markets lack adequate financing, amounting to a combined credit gap of approximately $1 trillion.

Women business-owners, in particular, face challenges in accessing capital. Constrained by legal and cultural barriers, as many as 70 percent of women-owned SMEs in developing countries report having to go without the financial tools they need to grow their businesses. In Egypt, where women own 30 percent of businesses, the credit gap among women-owned SMEs stands at $283 million. Not only does filling this gap represent a substantial market opportunity for banks, it also holds the potential for significant job creation in a country where the official unemployment rate is 12 percent – roughly double the global average. Among young people ages fifteen to twenty-nine, the unemployment rate is estimated to climb even higher at 33 percent, or 79 percent of the total unemployed. 

While microfinance programs have proven a boon to women – benefitting millions of women around the world through small-dollar loans used to cover household expenses and to create businesses – many microenterprises fail to become formal, employment-generating SMEs due to lack of larger, sustained credit options, a shortage of skills, and insufficient networks. Meanwhile, larger-sized financing mechanisms – particularly bank-funded small business loans, but also venture capital and private equity – target larger firms with promises of higher returns than the average SME can generate. In effect, this creates a "missing middle" and leaves both jobs and dollars on the table.

Egypt's banking sector clearly recognizes the importance of financial inclusion to the nation's economic future. Indeed, the theme of the Egyptian Banking Institute’s (EBI) ninth annual conference, hosted in early May, was Promoting Financial Inclusion in the Banking Sector. The program featured discussions on the importance of bringing more people into the banking system to boost GDP growth and poverty reduction, as well as the best paths and practices to advance financial inclusion, particularly for youth, women, and micro-, small-, and medium enterprises. 

As Egypt continues to flesh out its strategy for bringing all its citizens into the banking system, its economy could benefit from paying particular attention to that last group – small- and medium-sized businesses — the "missing middle."   

One idea is for the CBE to consider a parallel program to its newly launched microfinance initiative – this one focused on SMEs, especially those run by women. Such a program could be accompanied by training for women on business skills and how to best utilize financial services to grow their businesses. Sex-disaggregated data collection also could help to determine the financial products that would be most beneficial to female SME owners.

Banks in Egypt could also partner with multilateral organizations such as the International Finance Corporation (ICF), which is already active in SME financing. For example, mirroring the work of the IFC in neighboring Jordan, Egyptian banks could work with the IFC to establish distinct financial products and branding for the women’s SME market. One example of this in Jordan is the Shorouq brand of financial services for women at the Bank al Etihad, which targets women by providing collateral-free loans and special savings programs. Likewise, it could look to the work of the IFC in Pakistan, where bank staff are now offered incentives for opening accounts for women. Egypt could take this initiative one step further and offer incentives to staff that work with women-owned SMEs on credit and other financing options. 

Currently, Egypt has one of the lowest levels of financial inclusion, not only in its region, but across the globe. While the country has taken steps toward arming more and more people with bank accounts and other financial services – strengthening the regulatory environment and placing a greater focus on mobile banking – significant portions of the population will remain unbanked if the "missing middle" continues to be an overlooked part of creating value and generating prosperity for the nation's economy.