This chapter examines the role of fintech in improving access to finance for Egyptian SMEs and entrepreneurs. It highlights the potential of fintech solutions to address SMEs’ and entrepreneurs’ financing challenges. It also provides an overview of the growing fintech sector in Egypt, the key barriers to the development of the sector, and an assessment of the current regulatory and policy landscape. The chapter concludes with recommendations to leverage fintech's potential for supporting SME and entrepreneurship development in Egypt.
SME and Entrepreneurship Policy in Egypt
Abstract
As described in earlier chapters of this review, access to finance is one of the most significant and persistent obstacles to SME and entrepreneurship development, both in Egypt and in other countries. However, fintech solutions underpinned by digital technologies have considerable potential to alleviate the financing gaps faced by SMEs and entrepreneurs. The importance of new fintech technologies and products in enhancing access to finance is captured in the following element of the OECD Recommendation on SME and Entrepreneurship Policy.
Recommendation 13: Enhancing SMEs and entrepreneurs’ access to a diverse range of financing instruments, sources and channels that are adapted to their needs in terms of development, growth and sustainability, by implementing evidence-based policies and regulatory approaches conducive to transparent and resilient SME finance markets; leveraging the role of new technologies; encouraging timely payments; and strengthening SME financial skills and vision.
This chapter describes the potential role of fintech in stimulating SME and entrepreneurship development in Egypt and explores the role of policy in tapping into this potential.
Fintech has considerable potential to improve SMEs’ access to finance....
SMEs in Egypt face challenges in accessing external financing. Indeed, only 4% of Egyptian businesses with 5-19 employees having taken out bank loans, compared to a MENA average of 20% (World Bank, 2020[1]). While Egypt’s SME financing gaps are mitigated to some extent by the recent growth of the microfinance sector, this is not sufficient to support the growth, productivity and competitiveness of the SME sector.1
Fintech is a term used to describe any technology that delivers financial services through software. This includes online banking, mobile payment apps and cryptocurrency (US Chamber of Commerce, 2020[2]). Fintech solutions can be deployed both by traditional financing providers and alternative lenders. Over the past decade, fintech has had a transformational impact on the financial services sector, reshaping financial products, markets, payments and business models (World Bank, 2022[3]).
The fintech sector has emerged as an important driver of financial inclusion for SMEs and entrepreneurs, with many fintech companies taking advantage of rapidly digitalising economies to increase the affordability and accessibility of finance for SMEs and entrepreneurs.2 Fintech solutions can address SME financing constraints in several ways:
Service automation and facilitation: On the lenders’ side, the automation of services enabled by digital technologies can facilitate the provision of financing and reduce its costs. Processes such as client onboarding, credit analysis, due diligence and payment collection, which traditionally require considerable time and resources from bank staff, can be largely automated through fintech solutions. This results in simpler, faster and more cost-effective client acquisition, credit provision and monitoring.
Meanwhile, on the SMEs’ side, fintech companies can provide solutions that improve productivity and financial performance through the digitalisation and automation of processes such as sales, purchasing, billing and consumer engagement. These solutions also create a digital footprint for SMEs that financial institutions can subsequently use to develop tailored financial products.
New financial products: Digital financial technologies can enable the development of alternative financial products for SMEs. For example, factoring firms traditionally manage credit risks by purchasing the invoices of well-known and creditworthy borrowers. However, fintech solutions enable factoring firms to purchase the invoices of SMEs that have a more indirect supplier relationship with the more well-established larger enterprises in the supply chain (ADB, 2019[4]). Other alternative sources of funding that fintech can facilitate include peer-to-peer lending platforms, crowdfunding, revenue-based financing and tokenised assets.3
Alternative data sources and credit scoring: The use of alternative data, analytics and algorithms based on artificial intelligence and machine learning can make it easier for lenders to assess the credit worthiness of SMEs and verify the information provided in financing applications. This allows financial institutions to lend to SMEs without the high collateral requirements and the need for an extensive credit history that have historically restricted SMEs’ access to finance. Alternative data sources and the use of digital documentation can also facilitate the data verification process in financing applications, reducing processing and approval times. Furthermore, credit scores generated by fintech providers can be used to enhance national credit databases and registries, which in turn can contribute to improving the effectiveness of existing credit guarantee programmes or support the development of new initiatives (ADB, 2019[4]). The alternative data sources that fintech solutions can leverage include:
Geolocation data, which can verify SMEs’ home and work addresses.
Reputational data, such as those provided by parties who interact with an SME, which can be used to predict future behaviour.
Social media profiles, which can corroborate the information provided by SMEs and can be used to assess their market presence and customer reputation.
Customers’ visits and engagements with SMEs’ websites
Digital transactions data, such as bill payment or revenues, can be used to assess creditworthiness.
Increased transparency: Technologies such as blockchain can be particularly useful for Islamic finance as they can improve the transparency and traceability of assets and cashflows. This is a core principle of Islamic finance (IMF, 2020[5]).
… but fintech companies need suitable data, infrastructure, regulatory support and workforce skills
The provision of fintech services is only feasible if SMEs have an adequate digital footprint. The digitalisation of SMEs’ operations is, therefore, an important ingredient for the development of the fintech sector. This is a function of:4
The quality of digital infrastructure.
The digital literacy of entrepreneurs and SME owners.
The interoperability of digital payment systems.
The availability of digital public services (e-government).
The provision of support for SMEs’ adoption of digital tools and technologies.
The prevalence of digital payment methods through, for example, e-commerce and electronic wallets.
The penetration of mobile phone services.
Another important factor for the development of fintech services is the collection and sharing of data across entities. The implementation of open banking, for example, which allows third-party financial service providers access to consumer banking information, transactions and financial data from financial institutions via application programming interfaces (APIs), can have a profound impact on the development of the fintech sector. By enabling fintech companies to securely and consensually access (potential) customers’ account data and other relevant information, open banking can facilitate the development of more tailored products, the provision to clients of services that were previously unavailable to them, and the integration of fintech solutions in traditional banking and other financial services.
The market entry and innovative activities of fintech companies is challenging in the highly regulated financial sector. These challenges require bespoke regulatory solutions. For example, regulatory sandboxes enable start-ups with innovative solutions to test and develop their products in a structured environment without needing to undergo the regulatory approvals and administrative procedures required of firms operating in the market. Sandboxes also help new market entrants to better understand the expectations of financial market supervisors. Likewise, they give supervisors a more in-depth view and understanding of the new financial solutions entering the market and the potential new risks that can emerge from these entries (Parenti, 2020[6]).
Finally, the development of the fintech sector is contingent upon the availability of relevant technological and digital skills in the workforce. As a technology driven sector, fintech companies require people with skills in programming and software design. The sector is also driven by many new and innovative technologies, including machine learning, artificial intelligence, and blockchain, each of which require very specialised knowledge. Other important skills include knowledge of finance as well as soft skills such as languages and communication, adaptability, and teamwork (SMU, 2023[7]).
The adoption of fintech solutions also comes with important challenges
As the spread of the fintech sector is relatively new in Egypt, the deployment of fintech solutions raises concerns surrounding the inclusivity of the new products and services entering the market. Users with limited to no access to digital technologies are heavily disadvantaged in accessing fintech services. This affects those living in remote or economically disadvantaged areas, as well as specific groups including women. The use of alternative data sources and machine learning algorithms can also have differentiated impacts for different groups of borrowers. For example, an analysis of US mortgage data found that the use of machine learning algorithms increases the discrepancy in interest rates given to White or Asian borrowers compared to Black or Hispanic borrowers (Fuster et al., 2021[8]). It is important for policy makers to monitor closely the impacts of fintech-enabled lending practices on access to finance gaps between certain groups.
The widespread adoption of fintech has also brought with it data privacy and security challenges. Indeed, personal and financial data are now at greater risk of wrongful acquisition through electronic data breaches and cyberattacks. Given the nearly instantaneous nature of digital payments and transactions, there are further concerns about potential fraud and theft through the use of digital payment technologies. Addressing these issues requires strong regulatory frameworks and the effective enforcement of data privacy and protection and cybersecurity measures.
Some concerns have been raised about the opaqueness of credit scoring methodologies and potential inconsistencies between credit scores across different fintech providers. This can be a drawback for the use of these data to enhance public credit databases and guarantee schemes. Policy makers can alleviate these concerns through efforts to boost transparency, foster data sharing within the financial system and increase the alignment of credit scoring methodologies.
Overview of growing fintech sector in Egypt
Fintech is a relatively new but rapidly growing sector in Egypt, spurred by the significant rise in digital activity in the wake of the COVID-19 pandemic. Figure 8.1 shows that over the past five years, the number of fintech and fintech-enabled start-ups in Egypt has increased by 5.5 times from 32 in 2017 to 177 in 2022 (Central Bank of Egypt, 2023[9]). Egypt is also now the second largest provider of fintech solutions in the Middle East and North Africa region after the United Arab Emirates, accounting for 14% of fintech solutions in the region (Figure 8.2) (CGAP, 2020[10]).
The fintech sector in Egypt is dominated by two major sub-sectors: payments and remittances (36%) and lending and financing (11%) (Figure 8.3). Other businesses operate in business administration, personal finance, “insuretech” (tech innovations that improve the efficiency of the insurance industry), and “investtech” (fintech solutions that facilitate personal or business investment) (Central Bank of Egypt, 2023[9]).
Note: The figure refers to enterprises classified as fintech and fintech enabled start-ups
Note: The figure refers to enterprises classified as fintech and fintech enabled start-ups
Source: (CGAP, 2020[10]).
Note: The figure refers to enterprises classified as fintech and fintech enabled start-ups
The fintech sector accounts for the second largest share of start-ups in Egypt after e-commerce and retail-tech. It also accounts for the largest share of venture capital investments, with fintechs raising approximately a quarter of total start-up funding between 2017 and 2021 (MCIT, 2021[13]). In 2022, fintech companies accounted for 49.5% of the record high venture capital investments in Egypt (Figure 8.4).The fintech start-up sector in Egypt has also proven to be quite resilient, with a 5-year survival rate of nearly 80% for Egyptian fintech start-ups (CGAP, 2020[10]).
The pandemic spurred significant growth in the sector by accelerating the digitalisation of the economy. Recent years have seen a significant increase in the use of e-commerce and digital payments in Egypt. According to Mastercard’s New Payments Index 2022, 88% of people in Egypt have used at least one emerging payment method over the previous year, including tappable smartphone mobile wallets (35%), digital money transfer applications (27%) and QR codes (24%). The same survey found that over 60% of Egyptian consumers feel safe using digital applications for sending money through their mobile phones and 42% are willing to share their financial data with applications in order to have access to payment tools that help them manage their finances (Mastercard, 2022[14]).
Source: (Disrupt Africa, 2022[15])
Development bottlenecks
The cash-based economy and low digital financial literacy
Though there has been notable growth in electronic payments and e-commerce since the COVID-19 pandemic as well as the greater openness of consumers to electronic payments, Egypt remains a largely cash-based economy and digital financial literacy is relatively low among the population. Consumers and businesses prefer to conduct transactions via cash, and since there is no legal limit on the size of cash-based transactions, this practice remains prevalent even for large transactions. A 2022 survey found that 95% of Egyptians still make everyday payments and receive their salaries in cash, while 30% do not know what mobile wallets are and 22% have never heard of basic financial products such as loans or savings accounts (IFC, 2022[16]).
The propensity to favour cash-based payments is considerably stronger in Egypt even compared to peers in other middle-income and developing economies. Indeed, Egypt accounts for about half of the 20 million adults in the MENA region that receive private sector salaries in cash (Findex, 2021[17]). Moreover, a Findex survey analysing utility bill payment methods finds the share of account-based payments (both pre- and post-Covid) is low in Egypt compared to peer economies (Figure 8.5). The rise in electronic payment methods for utility bills post-COVID has also been more muted in Egypt than in other countries. However, the use of credit card payments in e-commerce experienced significant growth in Egypt during the COVID-19 pandemic, which facilitated the adoption of digital payments and accelerated the growth of e-commerce. In response to this, the Central Bank of Egypt launched the e-commerce initiative in 2021, with the aim of increasing the number of MSMEs that use e-commerce in the private sector, through waiving all fees incurred by private sector merchants from transactions with MSMEs until December 2023. The launch of this initiative has contributed to the growth of e-commerce transactions both in value and volume (Central Bank of Egypt, 2024[18]).
Note: Percentage of adults paying utility bills after the beginning of the COVID-19 pandemic
Source: (Findex, 2021[17])
Most international remittance services in Egypt are also cash-based. Banks enable cash-to-cash services through bilateral arrangements with foreign exchange houses and banks in Gulf Cooperation Council countries. Given the large size of the Egyptian diaspora, remittances represents an area where fintech can offer valuable alternatives that can enhance account ownership and digital payments (World Bank, 2020[19]).
There is also a sizable gender gap in financial literacy and the use of digital payment services. In Egypt, women’s usage of digital payments is 12% lower than men’s. By contrast in most developing economies, the digital payments gap between men and women is relatively narrow (Findex, 2021[17]).
As a result of the limited data, alternative credit scoring in Egypt is currently relatively limited and mainly relying on historical credit data rather than alternative data from social media and other sources. However, as Egypt transitions towards digitalization of payments, alternative credit scoring has potential to enable more access to finance in Egypt.
Workforce skills gaps
Skills gaps can affect fintech companies directly by creating challenges in finding suitably skilled workers. Indeed, in 2021, approximately about 45% of fintech companies in a CBE survey cited difficulties accessing talent as a major operational challenge (Central Bank of Egypt, 2022[20]). The main skills/knowledge that are difficult to find are technology and software skills (cited by 57% of respondents), compliance skills (21%), and business development and project management skills (19%) . Digital skills gaps also affect fintech companies indirectly by reducing the uptake of fintech solutions by SMEs and entrepreneurs, making it more difficult for fintechs to establish a customer base.
Egypt has undergone a period of intense regulatory and policy development in the area of fintech…
The development of the fintech sector is a key priority for the Central Bank of Egypt (CBE) and the Financial Regulatory Authority (FRA), which are the main regulatory bodies for the sector. In 2019, the CBE launched its Fintech and Innovation Strategy and established a dedicated department for fintech and innovation. The vision of the strategy is for Egypt to become a “regionally recognised FinTech hub in the Arab world and Africa”. In line with this objective, the CBE has significantly advanced the regulatory agenda on fintech, along with the Financial Regulatory Authority (FRA). Among the notable undertakings are:
The introduction of the Fintech Act, which regulates robo-advisory, nano-finance, insuretech, and tech-enabled consumer finance. Under the law, the FRA is established as the sole entity that can license and regulate all non-banking fintech activities. The law also sets out transparency and governance standards and the protection of consumer rights (MAGNiTT and ITIDA, 2022[21]). All banked clients have the right to escalate complaints to the CBE against any registered banks which are licensed by the CBE.
The passage of the Egyptian Banking Law, with the goal of increasing financial innovation in Egypt. This law introduces key provisions on FinTech and regulatory technology. The law authorises the CBE to take proactive measures to foster the adaptation of modern technology across various financial and regulatory services including online banking, electronic transactions, and authorization processes, among others (Global Legal Insights, 2023[22]).
The introduction of additional regulations that cover mobile payments and e-money. Digital remittances are covered in the general sector framework for remittances developed by the CBE and FRA, while regulations for equity crowdfunding and peer-to-peer lending are forthcoming (see Table 8.1).
The CBE and FRA are currently working on developing a framework for using alternative credit scoring data for financial institutions and allowing financial institutions to start looking at these alternative sources of data. However, as mentioned in the previous section, currently most initiatives rely on historical lending data rather than alternative data sources due to the relative scarcity of the latter.
The CBE has also recently launched an initiative to create a digital financial identity, designed to streamline KYC processes across financial institutions. This initiative aims to allow customers to provide their identification data just once, which will be stored in a secure government database accessible by various financial providers, including fintech companies. By implementing this solution, customers will no longer need to undergo the KYC process multiple times, facilitating broader access to financial services and enhancing the overall efficiency of the financial ecosystem.
The CBE has further launched the electronic payment initiative in 2020 to increase the spread and reach of electronic acceptance channels by publishing new electronic point of sale machines (POS) and quick response (QR) codes. These are distributed across all governorates in Egypt, with the aim of promoting digital financial services.
Lastly, the CBE has strengthened the security and resilience of its digital services infrastructure, through conducting thorough examinations of the infrastructure of fintech systems prior to granting them licences to operate in the market of digital services.
Egypt regulatory frameworks in detailed fintech areas
Note: Illustrates the regulatory stance towards fintech in various significant fintech sectors, highlighting Egypt's distinct provisions within its broader regulatory frameworks, which align closely with the common regulatory frameworks of the MENA region.
Source: (Cambridge Centre for Alternative Finance, 2021[23]) with updates by authors
Multiple regulations govern e-money and mobile payments in Egypt, including the third version of the mobile wallet regulation, which encompasses digital lending and savings features and enables receiving international remittances in Egyptian Pounds (EGP) through mobile wallets. Additionally, regulations for Technical Payment Aggregators and Payment Facilitators, as well as interoperability for cash-in and cash-out services via agents, have been established to strengthen the payment system. The CBE is further enhancing cross-border remittance services by enabling remittances through digital channels and bank accounts.
…but outstanding issues in the regulatory framework are hampering progress
Egypt has made significant progress in developing the regulations for the fintech sector in recent years, however there are still some important gaps in the regulatory framework. In particular, there are areas in which fintech companies can create opportunities for SME and entrepreneurship finance that are still not regulated. Start-ups or existing enterprises that wish to provide services in these areas thus cannot obtain operating licenses. The CBE and the FRA are currently working on issuing new laws to regulate some of these alternative finance activities, including peer-to-peer lending, crowdfunding platforms, ROSCAs, and digital savings. Additionally, some of these activities, such as ROSCAs and lending-based crowdfunding, are currently being tested in the CBE's regulatory sandbox. Implementation of the new regulations remains a challenge. For example, there are areas where legislation exists but executive regulations have not been put in place. This can deter investments in such activities until there is more clarity on the implementation of the regulations.
Existing regulations also create difficulties for fintech companies, with 44% of surveyed start-ups in the fintech sector citing regulatory compliance as a top focus area for their growth in the near future (Central Bank of Egypt, 2023[9]). This mirrors the situation across many sectors of the Egyptian economy, where complex legal frameworks with overlapping or sometimes contradictory provisions and limited guidance creates challenges for businesses, particularly SMEs and entrepreneurs that have limited resources and capacities to keep track of emerging and changing regulations. Likewise, regulatory approval is needed for any change in a product that already has been put in place in the market, which can lead to frequent need for interactions with regulators and wait times for up to a few months for each needed approval.
Open banking is an important enabler of fintech solutions but its reach in Egypt is currently limited
Open banking has considerable potential to foster innovation and competition in the financial sector. If the right regulatory framework is set in place and appropriate safeguards are implemented to protect consumer data, open banking can enable a wider range of financing providers to enter the market. This in turn can stimulate the development of a higher number of tailored financing solutions that serve a wider population of SMEs and entrepreneurs. Critical enablers of open banking include strong regulatory frameworks in cybersecurity and data protection and their proper enforcement. Open banking also requires digital authentication mechanisms such as national digital identities and e-signatures.
In March 2022, the CBE was authorised to regulate open banking in Egypt (see Table 8.2). The passage of the Cybersecurity Law in 2018 and the Consumer Finance Law in 2020 laid the foundations for open banking. The establishment of a national payment infrastructure through Instapay also provides an important basis for open banking.
However, some concerns have been raised during the fact-finding meetings in Egypt about the competitiveness of the open banking environment. Notably, there have been considerable delays in the issuances of APIs for financial institution and fintech companies wishing to operate in the business-to-consumer (B2C) space. The fact that the infrastructure provider Instapay has also entered the B2C space themselves has also raised concerns about the incentives for fostering a competitive field in the provision of B2C financing services.
Box 8.1 presents different international approaches that have been taken to promote the adoption of open banking.
There are two main (non-mutually exclusive) approaches to promoting the adoption of open banking:
A regulation led approach that mandates the sharing and disclosure of information.
An incentive led approach that works on a voluntary basis to promote open banking.
Regulation led approach
As part of a regulation led approach to promoting open banking, policy must align itself with existing data protection laws. The European Union’s Payment Services Directive 2 (PSD2) represented one of the first policies to target open banking. It mandated that, upon customer request, third party providers are given access to payment accounts of customers at banks and other payment service providers. Israel, Australia, Brazil, Colombia, Korea and Türkiye have adopted similar legislation that explicitly defines open banking and empowers third parties to access customer data in specific instances.
Incentive led approach
Governments are also leveraging incentives to drive traditional financial institutions to adopt open banking. One way to incentivise large financial institutions to engage in open banking is through the creation of data sharing frameworks. Under these agreements, all participating parties receive reciprocal access to customer data. Such agreements have been established in countries such as Türkiye and Brazil. Amid concerns surrounding whether such agreements conform with existing data privacy laws, other countries such as Australia and Canada, are creating an accreditation process to make sure only certain institutions qualify for these data sharing frameworks.
Another measure that can incentivise financial institutions to embrace open banking is the establishment of open API registries. These facilitate open banking adoption by reducing the time and investment cost of establishing secure platforms. An open API registry is a centralized platform that lists available APIs from various financial institutions and organisations, promoting standardisation, documentation, and support. It facilitates interoperability, compliance, and security, while also encouraging innovation and collaboration within the open banking ecosystem. For example, the Monetary Authority of Singapore (MAS) has introduced a Financial Industry API Registry that hosts a collection of open tested APIs made available by financial institutions. The Hong Kong Monetary Authority (HKMA) adopted a similar approach, instituting the Open API Framework that provides a secure, controlled operating environment for publishing APIs. These APIs include digital solutions for the purpose of sales, marketing, servicing and transactions.
Improving cybersecurity
Regardless of whether governments adopt a regulation or incentive led approach, open banking can only prosper in cases where systems are trusted and data is secure. To alleviate cybersecurity concerns, the EU’s PSD2 required that banks create special interfaces through which third parties can access customer data with technical considerations made to prevent screen scraping. PSD2 also aligns itself with the General Data Protection Regulation of 2016 by establishing strict regulations that forbid the use, access or storage of any data by third parties outside the requested transaction. To ensure the proper implementation of the PSD2, the European Banking Authority has adopted technical standards and guidelines on how to build data sharing platforms to ensure third-party providers only receive the intended data.
The promotion of data exchanges among institutions can both pave the way for open banking and help institutions hedge themselves against cyber-security risks. In Italy, the Banca D’Italia has sponsored data sharing among financial institutions as a way to mitigate cybersecurity risks. Türkiye is also considering the establishment of a cyber-security intelligence framework that would rely on data sharing arrangements across institutions.
MAS is also trying to ease cyber security concerns and enable open banking by establishing public digital infrastructure for the sake of data sharing. The Singapore Financial Data Exchange acts as a centralised gateway for data sharing, providing non-bank financial institutions with secure access to bank infrastructure. This allows for better planning by financial institutions and access to a reliable payment infrastructure.
Source: (OECD, 2023[24]), (OECD, 2023[25]), (HKMA, 2018[26])
Regulators are creating programmes to trigger the development of fintech solutions
Regulatory sandbox
The CBE established a Regulatory Sandbox in May 2019, to promote fintech adoption, reduce time and cost barriers, and encourage innovation in Egypt's financial sector. The sandbox aims to provide a live testing environment for fintech businesses in the country that cannot be regulated under the current regulatory framework.
The regulatory sandbox enables fintech developers to focus on their core business with a reduced regulatory burden. It is open to start-ups, established institutions, and registered fintech providers, including international participants. The CBE operates the regulatory sandbox in cohorts with specific start dates. The testing period typically lasts six months but can be extended. Participation is free, but companies need working capital (Central Bank of Egypt, 2019[27]). In order to join the regulatory sandbox, the fintech developers must meet the following eligibility criteria:
Their solutions must be an innovative solution within the area of fintech.
The solution must have identifiable benefits to customers directly or through market competition.
The solution should support financial inclusion and digital transformation in Egypt.
The solution must be ready for testing (idea-level solutions are not accepted) with a well-developed business plan with metrics to measure the solution’s performance.
The solution is unable to operate in the current regulatory framework.
The CBE launched its first cohort in 2019 focusing on innovation for e-Know Your Customer (KYC) and the remote opening of mobile wallet accounts. An open-theme cohort was subsequently launched in 2020, but there was a gap of several years in the opening of cohorts with the latest - for lending-based crowdfunding - opened in 2023. The limited number of cohorts has constrained the utility of this regulatory tool to many fintech companies, as have the strict eligibility criteria that have excluded those without fully developed solutions. E-KYC was the priority for the first cohort in the regulatory sandbox, for developments like digital on-boarding for new account owners through information extraction and facial recognition. During the COVID-19 pandemic, the Central Bank of Egypt (CBE) also temporarily simplified the onboarding process for mobile wallets by imposing specific requirements. Customers were required to sign the consented KYC after a designated period, and banked customers were also entitled to self-register for mobile wallets.
The sandbox has supported efforts to bolster fintech innovation, but there is considerable untapped potential from this regulatory tool. Stakeholders report that the sandbox has had limited utility for many companies that have taken part already. The focus on mature fintech companies that have already finalised their solution is further constraining the innovation potential of the sandbox. In addition, the limited number of cohorts has restricted the opportunities for many innovative companies to benefit from the sandbox’s services. However, the CBE has other programs and initiatives available which support start-ups at various stages including the matchmaking programme, the digital solutions programme, FinTekers, and Accelerate’ha. Evaluating the sandbox’s performance and impact may be useful to better understand and address key design and implementation challenges.
Box 8.2 below presents the evolution of Malaysia’s regulatory sandbox for the fintech sector.
Malaysia is one of many countries that have introduced a fintech regulatory sandbox in order to support the development of the fintech sector. The sandbox, established in 2016, has so far supported over 110 enterprises across many different sectors including insurance, money services, payments, banking and lending. The sandbox is currently open to applicants who can demonstrate that their solution can strengthen the accessibility, efficiency, security and quality of financial services. It also requires that applicants have a business plan that demonstrates a viable business model upon the exit of the sandbox. The sandbox further requires that firms identify potential risks in areas such as financial stability and consumer protection. Interim and final reports help the sandbox operator and participants to assess the viability of the innovation, to address key issues and mitigate risks before the solution is placed in the market.
Since its inception, the sandbox has evolved to reflect changing market needs. Notably, in 2018, the central bank introduced so-called “Specialised Sandboxes’ with thematic tracks that enable more specialised testing. Moreover, in early 2023, the central bank proposed a revision to the sandbox framework in response to the changing fintech landscape and the need for more efficient testing of digital solutions. The new proposed framework includes two main changes:
Simplifying the eligibility criteria to enable early stage fintech start-ups to also quality for the sandbox, in order to help these companies secure the resources needed to support further develop their products. The new proposal allows for the assessment of proposed solutions at conceptual level, which can be validated further during the testing period, without a requirement to demonstrate evidence of impact at the application stage. The proposal also provides more room to develop and demonstrate risk management capability and a suggested three-month timeframe to deploy the solution for testing within the sandbox.
The so-called Green Lane is proposed to encourage financial innovation among financial institutions by enabling faster-track validation processes. The alternative track is designed to reduce the cost of compliance and time to market for existing financial institutions (i.e. not fintech companies unless they have developed a joint solution) that are in the process of market validation for their solutions in the sandbox.
Source: (IMF, 2020[28]); (IFNFINTECH, 2023[29])
Fintech Fund Nclude
One of the main pillars of the CBE’s Fintech & Innovation Strategy is the provision of funding for innovative ventures in finance, with a specific focus on FinTech and FinTech-enabled businesses. The Fintech fund Nclude was established in March 2022 led by three commercial banks (Banque Misr, National Bank of Egypt, and Banque du Caire), in co-operation with the Egyptian Banks Company (EBC), the E-finance Investment Group and Mastercard. Nclude aims to catalyse Egypt’s transformation into a digital and financially inclusive economy, by supporting early and growth stage fintech start-ups. The fund aspires to become the largest focused fintech fund in the MENA region with target capital of USD 150 million (Central Bank of Egypt, 2023[30]).
Fintech and Innovation Hub
The GRID Fintech and Innovation Hub is a 2022 initiative by the CBE to develop a unified platform for fintech innovation by bringing together fintech start-ups, financial institutions, regulators, technology and service providers, and investors. Additionally, the hub’s headquarters in Cairo provides coworking and office spaces, conference rooms, and auditoriums to host fintech start-ups from Egypt and across the region (Central Bank of Egypt, 2023[12]). The main goals of the hub are to become a one stop shop for the fintech ecosystem, foster innovation, and contribute to the expansion of the fintech sector. It further aims to initiate programmes in collaboration with banks, global financial service providers and regional fintech hubs to stimulate the growth of fintech startups, and accelerate their market compliance. The Fintech Egypt Portal was launched in 2019, and acts as a complementary online gateway for the hub, through unifying fintech companies and facilitating matchmaking between different stakeholders.
The government is taking steps to address the cash-based nature of Egypt’s economy, which remains a major bottleneck to fintech development
Although there is increased digitalization in Egypt, the limited use of digital payments in Egypt results in businesses having a limited digital footprint. As a result, fintechs do not have access to the data needed to make assessments of businesses’ credit worthiness and borrowing and repayment capacity and determine appropriate financing terms. This restricts their capacity to deliver alternative credit scoring and financing solutions to unbanked SMEs and entrepreneurs. Egypt’s cash-based economy also inhibits the growth of the fintech sector by reducing the demand for fintech solutions among SMEs and entrepreneurs. Furthermore, regional and gender gaps in access to digital technologies limit fintech companies’ ability to provide services to important unbanked populations of SMEs and entrepreneurs, which raises concerns about the intrinsic biases and equity of distribution of fintech solutions.
Fostering the digital payments ecosystem and promoting digital transactions is therefore critical for the development of the fintech sector in Egypt. Creating a conducive ecosystem for digital payments can help accelerate the creation and adoption of digital payment solutions. Towards this goal, Egypt’s Cashless Transaction Law, passed in 2019, and in effect since September 2021, requires public entities and private entities exceeding a specified size threshold to pay salaries, loans, donations, subsidies, rent or land expenses, governmental payments, and insurance premiums by digital means. Failure to comply results in a fine of 2-10% of the total value of the cash payment (capped at EGP 1 million). However, most private sector salaries, including those in the informal and formal sector, are still paid in cash.
Egypt has taken several initiatives to to build up the digital payments infrastructure. This includes the establishment of the National Payments Council (NPC), the Less Cash Transformation Framework and the national payment scheme “Meeza’’. The Meeza card, implemented by the CBE in 2019, promotes digital payments, available to any Egyptian with a national ID and access to a bank branch or bank agents and service providers. The Meeza card is available either as a debit card or a prepaid card. The latter option is the most popular, with the prepaid card having accumulated 34.5 million users since 2019 , of which 10 million are currently active. All public sector employees receive their salaries through Meeza, which is one of the factors behind the scheme’s strong uptake. Meeza Digital provides the option for a mobile wallet, which have shown particular success, with mobile wallet accounts reaching 39 million by the end of 2023. This service encompasses various transactions, such as paying for traffic services, making donations to charitable organizations, and issuing virtual card numbers (VCN). Furthermore, individuals can receive pensions and salaries directly into their mobile wallets, facilitate account value loading through bank cards (AVL), and receive international money remittances. Availing e-commerce purchases can be completed through scanning QR codes and utilising Request to Pay (R2P) functionalities, which accept mobile wallet payments remotely. The introduction of the Instant Payment Network (IPN) has facilitated financial transactions between bank accounts, Meeza prepaid cards, and mobile wallets through the InstaPay mobile application, enabling customers to seamlessly perform transactions. The Egyptian government has further introduced the farmer smart card for the agricultural sector, which is one of the country’s most cash-based sectors. With this card, Egypt can digitize farmers data, allowing them to make digital payments, and use alternative sources of data to have access to financial instruments based on their digital profiles in the new agricultural marketplace called e-Aswaaq Misr. In 2021, 3 million farmers had obtained a farmer smart card, of which 1.5 million were active users of the card (FinTech Egypt, 2019[179]) (IFC, 2022[52]).
The Less Cash Law has played a notable role in restricting cash usage for payments exceeding 500 EGP at government entities, and subsequently mandating all payments to be conducted electronically. This initiative extends to Government-to-Person (G2P) and Person-to-Government (P2G) transactions, promoting the digitalisation of salary payments, pensions, and public service fees. Furthermore, the CBE's electronic payment initiative, launched in 2020, aims to increase electronic acceptance channels by deploying new POS machines and QR codes across all Egyptian governorates, improving accessibility to digital financial services. The Covid-19 pandemic resulted in the CBE taking additional measures to increase digital payments including the issuance of mobile wallets and prepaid cards for free, as well the cancellation of commissions and fees on transfers between different bank accounts and mobile wallet accounts.
Measures have also been taken to increase the efficiency and accessibility of electronic banking services. The Egyptian Banks Company enables interoperability across various payment methods, ensuring accessible financial services, while the Instant Payment Network (IPN) enhances payment ecosystem efficiency.
The Egyptian banking sector also offers a mobile wallet service tailored to meet diverse needs, including P2P transfers, mobile top-ups, and bill payments. This service encompasses various transactions, such as paying for traffic services, making donations to charitable organizations, and issuing virtual card numbers (VCN). Moreover, individuals can receive pensions and salaries directly into their mobile wallets, facilitate account value loading through bank cards (AVL), and receive international money remittances. Additionally, availing e-commerce purchases by scanning QR codes and utilizing Request to Pay (R2P) functionalities to accept mobile wallet payments remotely as well as using cards, provides users with a financial solution for non-cash payment acceptance.
Measures to strengthen the digital payments ecosystem should be complemented with direct incentives for consumers and merchants to use digital payments. The case of India provides an example of an effective, multi-pronged approach to promoting the use of digital payments (Box 8.3). The Central Bank of Egypt implemented several precautionary measures in response to the COVID-19 pandemic, including waiving fees on mobile wallets and local transfers, simplifying mobile wallet account openings, and eliminating fees on points of sale and ATM withdrawals. Further efforts to boost account ownership for savings and payments should also be encouraged, including, for example, mandating the electronic payment of utility bills, which are still overwhelmingly paid in cash in Egypt.
The Indian Ministry of Electronics & IT (MeitY) in collaboration with the central bank have taken a number of important steps to promote digital payments:
1. The incentive scheme for promotion of RuPay Debit cards and low-value BHIM-UPI transactions. The Bharat Interface for Money (BHIM-UPI) is a payment app that facilitates money transactions and requests through a Unified Payments Interface (UPI). Customers can make a payment to anyone on the UPI using their UPI-ID or QR through the BHIM app. This initiative supports banks in establishing a strong digital payment infrastructure, promoting the adoption of RuPay Debit cards and BHIM-UPI transactions across various sectors and demographics, and fostering the expansion of digital payments throughout the country.
2. MeitY has introduced several other incentive or cashback schemes to encourage both customers and merchants to adopt digital payments at a faster pace. These include the BHIM Cashback Scheme for Individuals & Merchants, the BHIM Aadhaar Merchant Incentive Scheme, the BHIM-UPI Merchant On-boarding Scheme, and the Merchant Discount Rate Reimbursement scheme.
3. MeitY has issued advisories to other government entities, urging them to improve the acceptance payment infrastructure such as Internet banking, mobile banking, and mobile applications. This initiative aims to enable citizens to make payments conveniently using different digital methods.
4. MeitY’s "Pradhan Mantri Gramin Digital Saksharta Abhiyan (PMGDISHA)" scheme aims to promote digital literacy in rural areas of India by providing the skills and knowledge necessary to effectively use digital technologies and participate in the digital economy.
5. MeitY has advised banks and payment service providers to conduct awareness campaigns to promote secure payment practices and raise awareness about information security.
6. To promote digital payments, including the BHIM app, MeitY has organised awareness campaigns (including newspaper, radio, billboard and social media campaigns) in major cities in Northeast India.
7. To commend India's growth in digital payments, MeitY organised the 'Digital Payment Utsav' celebration. This brought together leaders from the government, banking sector, fintech companies, and startups. Top banks were given awards in different categories to recognise their accomplishments in promoting digital payments.
8. MeitY has collaborated with the Ministry of Consumer Affairs (MoCA) to integrate Digital Payment Grievances into the National Consumer Helpline (NCH) platform, which is managed by the Department of Consumer Affairs (DoCA). This integration allows consumers to report grievances related to digital payments through the NCH platform. Major banks and financial service institutions have been included in this initiative, ensuring that consumers can address their digital payment issues through this centralized platform.
Promoting digital financial literacy is also critical for boosting the uptake of the growing supply of digital financial solutions. This is a particular priority for women, given the large gender gap in the use of digital payments. However digital financial literacy programs can also be developed for young people, including within formal education curricula, for the elderly, who have limited awareness but are an important consumer group, and for SMEs. The CBE is currently in the process of drafting a National Financial Literacy Strategy to address these issues. Some examples of programmes specifically targeted at women and SMEs within the OECD and other peer countries are presented in Box 8.4.
Women
The Reserve Bank of India has co-ordinated with the National Rural Livelihood Mission, an agency focusing on livelihoods and skill generation for rural women, to share financial education messages. The messages, available in regional and local languages, have been disseminated widely through various platforms, including instant messaging applications such as WhatsApp.
In New Zealand, the Sorted at Work seminars offered by the Commission for Financial Capability (CFFC) provide dedicated sessions for women, which focus on financial situations women are likely to face. The sessions aim to help women develop knowledge, attitudes and beliefs that increase positive financial behaviours and give them confidence to take action to secure their financial future.
SMEs
In France, the central bank has designed a website (mesquestionsdentrepreneur.fr, “my questions as an entrepreneur”) to support entrepreneurs with tailored financial education resources and digital tools to support business creation and development, with a view to increasing the financial resilience of targeted entrepreneurs. It includes guides on topics such as effectively calculating selling prices and adequately insuring business operations, and it also offers guidance on administrative and legal procedures.
In Morocco, the Financial Education Foundation has a dedicated section on entrepreneurship on its financial education website. Through this, SME owners can test their knowledge of accounting and other important aspects of business creation and development, access calculators to better manage their businesses’ finances, and navigate tax issues. During the COVID-19 crisis, the Foundation stepped up its digital initiatives to support SMEs, including through social media campaigns, videos, and expert interviews on topics linked to digital financial services and managing a company in times of crisis.
In Portugal, the website of the National Plan for Financial Education has a dedicated area to support entrepreneurs who intend to launch a company. The information and tips available in this area provide an overview of what entrepreneurs need to be aware of before starting a business, such as the legal procedures required to set up a company and the different forms of financing they can benefit from. This area also includes a section aimed at managers whose firms are facing difficulties, in which a set of tips is available to help them overcome hard times.
To help micro and small businesses recover from the COVID-19 crisis, the Bank of Italy partnered with business associations to launch a financial education initiative in 2021/2022, specifically aimed at developing the financial and entrepreneurial skills needed to run a small business. The initiative includes a mix of online lessons and opportunities for participants to discuss and ask questions in person.
In Peru, the Ministry of Production has implemented a virtual financial education programme to educate owners of micro and small enterprises on how to access credit for working capital, to inform them about business support programmes, and to teach them how to manage their businesses’ finances.
Source: (OECD, 2021[32])
There is significant potential to foster the fintech sector by addressing skills gaps
Policymakers in Egypt have taken large steps to address skills shortages affecting fintech development. The Egyptian Banking Institute, affiliated with the CBE, provides many financial educational materials in addition to the training courses that were provided through the Decent Life Initiative. Further, the CBE’s FinTech for Youth initiative aims to raise awareness on fintech and digital solutions among university students. The scheme incorporates fintech projects into students’ curricula so that they can participate in Egypt’s “National Fintech Problem Statement”. Currently there are 25 universities that are part of the initiative, which has already expanded to other governorates in the country. (MAGNiTT and ITIDA, 2022[21]). The CBE also offers talent programmes for undergraduate and postgraduate students, including the FinYology graded project, the FinTech got Talent competition, the Accelerate’ha’ and the Digital Academy. Box 8.5 provides some international examples of upskilling programmes and programmes to promote fintech and digital skills among youth. The SME digitalisation chapter of this report examines the policies and programmes in place in Egypt to address digital skills gaps more generally, which in turn can boost the demand for fintech solutions.
The Monetary Authority of Singapore (MAS) in 2020 authorised a USD 90 million support package aimed at strengthening the workforce capabilities of the financial services and fintech sectors. This includes a job support scheme that offers allowances for workers and subsidies for businesses to cover the costs of worker training through accredited courses. The MAS has also launched a set of grant schemes to employers who hire recent graduates and place them into talent programme management schemes. For fintech, additional support is provided as part of the support package launched in 2020.
The United Kingdom (UK) has rolled out a pilot “Upskill in Cyber” programme, which seeks to upskill existing workers and connect them with employers. The programme runs for ten-weeks, with options to complete the course online or in-person. Candidates who complete all the requested courses are guaranteed an interview with partnering employers. Another relevant UK initiative is the National Centre for Computing Education, which has established a set of technical digital education options for 16–19-year-olds. These technical courses include subjects such as Digital Business Services, Digital Production, and Digital Support Services.
Meanwhile, the Hong Kong Monetary Authority (HKMA) launched the Industry Project Masters Network (IPMN) scheme as a way to develop fintech talent. The programme assigns postgraduate students from local universities to fintech projects for a duration of up to eight months. During these projects, students are supervised by industry mentors from financial institutions, consulting firms and tech companies.
Fintech start-ups face exciting challenges and there’s room for streamlining the administrative process to enhance their journey towards success
The licensing process for fintech companies in Egypt can be complex and time consuming, which is a major deterrent for market entry both of domestic and foreign enterprises. Specifically, new market entrants face considerable ambiguity over what is needed to obtain license(s), a lengthy process to obtain the license(s) and considerable financial costs that are particularly burdensome for start-ups and micro and small enterprises. Stakeholders also report that shortages of technical expertise within regulatory bodies are another challenge faced by fintech companies. Reducing the administrative burden on fintech start-ups can promote greater innovation in the financial sector, the growth of new fintech companies and the expansion and diversification of digital financial solutions that can address the financing needs of Egyptian SMEs entrepreneurs. Some examples of approaches that have been taken to lighten the burden on start-ups in OECD countries and beyond are provided in Box 8.6.
Public entities across the world are adapting their licensing and regulatory regimes in order to pave the way for the development of fintech companies and services:
The European Commission (EC) has taken major steps in introducing flexible licensing as a means of promoting the growth of new fintech firms. Previously, crowdfunding firms in EU member states were regulated and authorised according to the same standards as investment services. Through the “European Crowdfunding Service Providers for Business” regulation the EC has since introduced more relaxed authorisation requirements for crowdfunding services by removing minimum initial capital requirements and product governance requirements and increasing insurance flexibility.
Australia offers licensing exemptions for fintech companies that have a small number of clients or who offer products of only small sums. Additionally, Australia has instituted a modular licensing scheme that allows companies to bypass certain regulatory hurdles and obtain licenses only for the specific services they provide.
The Hong Kong Monetary Authority (HKMA) as part of its Banking Made Easy initiative streamlines regulatory requirements for remote customer onboarding, account maintenance, online finance and online wealth management. Banks under this initiative may use technology such as big data and consumer behaviour analytics to determine credit worthiness for a part of their portfolio instead of relying on traditional metrics such as borrowers’ proof of income.
In Lithuania, additional efforts are being taken to lower business’ administrative burdens and bypass . Licensing requests can be made remotely and are fast-tracked with guided government support. The government has also established CENTROlink, which allows for institutions without a banking license to access the Single Euro Payments Area (SEPA).
Strategic use of sandboxes can also be used to lower licensing requirements. For instance, the United Kingdom’s sandbox offers a temporary form of authorisation for a defined period of time, after which companies can apply for full authorization if needed. To ensure that consumers are protected, a dedicated advisor is assigned to each authorisation to follow the process and check the outcomes. Meanwhile, in Abu Dhabi, companies can operate for up to two years in the “RegLab” without a traditional license. Certain restrictions are imposed as a safeguard, such as limits on the number of products, types of customers, size of transactions, and the geographical area where products can be offered.
Egypt has made considerable progress in strengthening the regulatory and policy environment for fintech and establishing measures to support the sector. As elaborated in the section on the state of fintech in Egypt today, there are many opportunities for public sector action to further foster the development of the fintech sector and strengthen its ability to close the SME financing gap.
Fostering the expansion of the fintech sector will require a more adaptive and agile regulatory framework that can promote financial sector innovation, enable market entry for new Fintech players and enable integration of Fintech services with the traditional banking sector. This means that the regulatory sandboxes established under the CBE and FRA should seek to maximise the opportunities for entry for diverse fintech solutions, including solutions at idea level, and should be complementary in their operations. In order to reduce the regulatory burden on smaller firms and new market entrants, the regulators should also consider implementation of tiered licensing and other regulatory procedures that take into account enterprises size and contribution to system risk when defining their regulatory and licensing requirements.
Growing the digital payments ecosystem is also critical to generate the data and digital footprint that can facilitate the development of tailored digital financial solutions for SMEs and entrepreneurs. This can entail the provision of incentives, such as cashback or discount programmes, for the use and acceptance of digital payments among consumers and merchants, including mobile wallets; the provision of incentives for digital payment of utility bills; tax incentives for utility companies and the provision of digital financial literacy trainings or education programmes, particularly for women and SMEs.
Promoting a conducive business environment for Fintech companies, underpinned by a National Fintech Strategy, would also be critical to enable the development of more diverse and cost-effective financing solutions for small businesses. Some proposed solutions in this area include providing incentives (e.g. tax breaks or regulatory exemptions) for financial institutions that partner with fintech companies, as this is identified as a key challenge for many fintech providers currently. Fostering more competition in the B2C space and the issuance of APIs for financial institutions and fintech companies wishing to provide financial services to SMEs is critical in this regard.
Access to talent and skills is critical for the growth of the fintech sector and is currently an important bottleneck for the fintech providers. Fostering relevant skills in the formal education system and its better alignment with labour market needs is critical in this regard. This should be accompanied by initiatives for upskilling and reskilling of the existing workforce to meet the demands of this growing and high-potential sector in Egypt.
Improving the regulatory and policy environment for fintech companies
Develop a National Fintech Strategy to underpin the comprehensive reform agenda in the sector.
Implement tiered regulatory and licensing procedures for fintech companies to facilitate market entry and reduce the regulatory burden for smaller financing providers.
Implement a cohort-free model of the regulatory sandbox or otherwise open more cohorts to enable a greater number and a more diverse set of solutions to gain access to the Sandbox services, including ideas at earlier stages of development.
Ensure complementarity between the CBE sandbox and the newly-established FRA sandbox.
Create a regulatory framework for revenue-based financing and other financing solutions that fintech companies can tap into to close the financing gap for MSMEs and entrepreneurs.
Foster the digital payments ecosystem
Provide incentives, such as cashback or discount programmes, for the use and acceptance of digital payments among consumers and merchants, including mobile wallets.
Provide incentives for digital payment of utility bills through, for example: cashback or discounts, waiving of processing fees, awards for consumers, and tax incentives for utility companies.
Provide digital financial literacy training or education programmes, particularly for women and SMEs.
Foster a conducive business environment for Fintech companies wishing to operate in the B2C space
Provide incentives (e.g. tax breaks or regulatory exemptions) for financial institutions that partner with fintech companies.
Promote more competition in the B2C space and issuance of APIs for financial institutions and fintech companies wishing to provide financial services to SMEs.
Support fintech education and skills
Upgrade the digital skills of the existing workforce through trainings, such as ICT bootcamps, possibly provided in collaboration with the private sector.
Strengthen the quality of STEM education and encourage more students, especially women, to pursue STEM education.
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← 1. The Business Environment chapter of this report provides a more comprehensive summary of SMEs’ and entrepreneurs’ access to finance in Egypt.
← 2. Studies in economies with more developed fintech sectors have also found that unsecured lending through fintech providers can enable SMEs to invest in assets that they can subsequently collateralise to access bank financing, providing enterprises with a more diversified portfolio of financing options.
← 3. An SME can issue a blockchain token, that enables the digital representation of an asset (tangible or intangible). This asset can be then traded, discounted, or financed as a collateral through a distributed ledger (an electronic system that allows information registration from more than one entity).
← 4. The SME digitalisation chapter of this report discusses the above points in greater detail.