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Outline

Bancarization Concept & Importance

Bancarization Measures

Bancarization Framework & Environment

Bancarization in Egypt (Country Comparison)

Conclusion

Recommendations

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Introduction

Banks play an important role in the economies of developing countries. This arises from the fact that :

*** Banks mobilize and allocate society’s savings, especially in developing countries. *** Banks are a very important source of finance for firms, especially that most developing countries are bank based not market based.

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Definition of Bancarization

Bancarization, is the level of access to and the degreeof use of formal financial services generally andbanking services particularly.

Bancarisation mainly refers to the percentage ofpopulation with/without access and use of bankingservices.

(Alejandra Anastasi / Emilio Blanco / Pedro Elosegui /Máximo Sangiácomo)

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The issue of Bancarization is increasingly gaining interest due to itssignificant implications to financial depth and economic growth.

The actual penetration of banking practices (rate of bancarisation) withina population is both an indicator of and instruments for economicmodernization.

Various economic theories advocate the fact that bancarization ispositively associated with an efficient allocation of resources and a higherGDP growth rate in the long run.

Importance of Bancarization

A kind of relationship might exist between access & usage of bankingservices on one side, and financial depth on the other side. Though this doesnot mean that the two concepts are identical in the sense that the level ofbancarization and the degree of financial depth can in some cases differ insignificant ways.

Financial depth might increase without being coupled by an equivalentincrease in access to and use of financial services measured by the numberof accounts or number of persons with access. There are instances in whichincreased use of financial services by the already banked population mayresult in a n increase in the financial depth without increasing the ratio ofpopulation with access and use of regulated financial services.

Bancarization Versus Financial Depth

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Bancarization Depth

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Measures of Bancarization

Supply “Access“

Demand “Usage“

The level of real consumption /usage of banking services. A widerange of banking services might bemade available, but not made use of.

The availability and supply ofquality banking services atreasonable cost.

Indicators of “Bancarization”, try to measure the percentage ofpopulation that actually have access to and make use of financialservices.

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1 - Supply Side “Access”

1 – Types of

Banking Services

2 – Channels of

Delivery of

Banking Services

Conditions of Dealing with the Formal

Financial Sector (Costs, Literacy, Collateral)

Level of Customer Service

1 - Supply Side “Access”

Credit

Facilities

Means of

Payment Saving Vessels

1 – Types of Banking

Services

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The relative importance of each type differs according to the client

segment needs & characteristics.

More diversification in the characteristics of each type further

enhancing bancarization.

Access to credit is the most crucial factor because, of

its role in the promotion of economic growth

Access to means of payment facilitate trade , allows

smoothing of consumption, reduce risk and costs

associated with maintaining liquid asset holdings.

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Branches

ATMs

Internet

2 – Channels of Delivery

of Banking Services

Phone Bank

1 - Supply Side “Access”

The relative importance of each channel differs according to the

client segment level of financial literacy.

Relative importance of Branches is decreasing with the introduction

of more developed channels.

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Consumer

Using Banking Services Not Using Banking Services

Involuntary Voluntary

Self Excluded by

Expectations

Not Using The Service

at its Current Conditions

Lack of Access

To Banking Services.

Rejected by the

Banking Sector

2 - Demand Side “Usage”

2 - Demand Side “Usage”

Some people may exclude themselves because they are not satisfied

with the service at its current conditions (Cost/ Quality)

Some individuals are rejected from dealing with the formal financial

sector because :

They fail to meet formal requirements (such as collateral, or

financial illiteracy)

Voluntary

Involuntarily

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Other individuals may lack the access to banking services in a certain

geographical area.

Here arises the role of the regulator to foster banking sector

expansion in some areas.

Some people may expect that they are excluded due to :

Considering themselves not eligible (not economically

attractive)

Cultural or religious reasons

Actual Usage of Banking Services

Interaction between Supply & Demand

The issue of access to banking services depends significantly on thecharacteristics of each country which affect supply & demand of bankingservices. The data on actual usage of financial services is a combination ofboth supply & demand.

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It is possible to have situations inwhich a very high demand for financialservices faces a supply that isconstrained by certain factors.

On the other hand, it is also possible tofind situations in which demand forbanking services is constrained byother types of factors.

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Lower Financial Literacy Lower Usage of Financial service.

Age & Gender Distribution

Income Level and Per Capita Income

Percentage of Rural Population

Higher Consumer Pattern Higher Demand On Retail Services

1 - Demographic and Socio Economic Factors

Employment & Higher Income Higher Propensity To Save

Economic, Regulatory & Institutional Framework

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2 –Regulatory & Institutional Factors

*** A consensus exists about the need to design and implement adequatebanking regulations -> promoting financial stability and access to financialservices -> avoiding excessive risk-taking by banks.

*** Three types of regulations can be identified in this category: An excessive tax burden on the banking system, including a tax

on financial transactions; Controls on interest rates and Directed loans.

*** Institutional Factors : Bureaucratic inefficiencies Lack of protection of creditors’ rights Deficiencies in property registries, which makes collateral non

reliable

Economic, Regulatory & Institutional Framework

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2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07Nominal GDP at Market Prices ($bn) 93.1 84 69.3 78 93 108.4 117.7Real GDP Growth (%)

3.4 3.2 3.2 4.1 4.5 6.8 7.2Population (mn)

64.7 66 67.3 68.6 70 71.3 72.6Real GDP Per Capita ($)

1,285 1,273 963 1,036 1,323 1,520 1,653Share of Private Sector in GDP 70.7 65.4 64.9 62.2 62.3 62.9 naUnemployment (%)

9.2 9 10.5 11.1 10.5 10.9 na

Source : Ministry of Finance

Key Economic Indicators

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Source : Ministry of Finance

Key Economic Indicators

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Source : Ministry of Finance

Key Economic Indicators

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Since September 2004, Egypt has embarked on introducing a bankreform program, aiming at Strengthening the banking sector andincreasing its robustness to enable it to face global and regionalcompetition effectively, and help achieve targeted economic growth.

The Egyptian Bank Reform

Program

Restructuring of State-Owned Banks Privatization of Public Ownership in JV Banks Privatization of (at least) One State Owned Bank Consolidation of the Egyptian Banking Sector

through Enhancing Voluntary Mergers

Through

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Indicator Dec-04 Dec-05 Dec-06 Sep-07

Loans/Deposits 61.2 58.6 58.2 54.5

Net Profit/Equities 9.1 10.7 17.7 14.3

Net Profit/Assets 0.5 0.6 1 0.8

Capital Adequacy 4.8 5 4.9 4.9

Source : Central Bank of Egypt

Key Banking Indicators

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0

500

1000

1500

2000

2500

3000

3500

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

Number of Bank Branches in Egypt

1 - Bank Branches (Number)

In spite of the decrease in number of banks from 54 to 39 banks, the Egyptian

banking sector witnessed an increase in the number of bank branches.

Number of Branches / 100,000 Persons

High Income Countries 34.5

Latin American Middle Income 7.5

Middle Income Excluding Latin American 9.3

Egypt 3.66

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0

200

400

600

800

1000

1200

2004 2005 2006 2007

Public Banks Branches

Private Banks Branches

Development in the Number of Bank Branches

After 2004, and with the changes thatoccurred in the structure of the Egyptianbanking sector (due to mergers &acquisitions), both public and private bankssignificantly increased their network ofbranches. However, Foreign banks have limited theirgeographical expansion within large urbanareas.While Public banks are more present inareas with low level of banking sectorpresence.

1 - Bank Branches (Public # Private)

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Cairo , 635

Alexandria , 227

Port Said , 38

Isamailia , 34

Suez , 27

Beheira , 51Damietta , 46Kafr El Sheikh, 37Gharbia , 66

Menoufia, 52

Dakahlia , 76

Sharkia , 92

Kalioubia , 46

Giza, 267

Fayoum, 29

Beny Sueif , 28

Menia , 51

Assiout, 49

Sohag , 54

Kena , 64

Aswan, 39Matrouh, 16

El Wady El Gedid , 8Red Sea, 57

North Saina , 16

South Saina, 60

1 - Bank Branches (Distribution)

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2 –ATM Machines

0

500

1000

1500

2000

2500

3000

31/1

2/2

002

30/6

/2003

31/1

2/2

003

30/6

/2004

31/1

2/2

004

30/6

/2005

31/1

2/2

005

30/6

/2006

31/1

2/2

006

30/6

/2007

Number of ATM Machines In Egypt

Number of ATMs / 100,000 Persons

High Income Countries 71.2Latin American Middle Income 13

Middle Income Excluding Latin American 16.2

Egypt 3.4

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Worldwide the majority of banks prefer to expand the provision of

financial services by means of ATMs rather than by branches.

In Colombia, while the increase of branches only shows a

slight rise between 2004 and 2007, the increase through ATMs

was of 65 percent.

In Mexico and Brazil increases of ATMs rose by 52 percent

and 30 percent respectively between 2004 and 2007.

In Egypt, the number of ATM machines, increased by 112%

between 2004 and 2007.

This data suggest that the extensive use of ATMs may be

relatively a cost effective way of increasing access to banking

services.

2 –ATM Machines

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Credit to the Private Sector / GDPCredit to Private Sector / GDP (Average 1999 -2003)

High Income Countries 96.1

Latin American Middle Income 32.7

Middle Income Excluding Latin American 44.1

Egypt (2007) 40 0

10

20

30

40

50

60

Credit to Private Business Sector / GDP In Egypt

Private credit growth has a positive correlation with GDP growth in the long run. Eventhough , such relation could be negative on the short run, due to the impact of the rapidincrease in credit facilities on the collections, and hence on the solvency. In Egypt bothbank deposits & loans relative to GDP, show values that are equal to those of relevantmiddle income countries, and little less than developed countries.

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0

50000

100000

150000

200000

250000

300000

350000

400000

450000

500000

2002 2003 2004 2005 2006 2007

Number of Borrowers With Loan Size of (30 , 000 LE Or More)

3 - Number of Borrowers

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The Egyptian economy has a lot of potentials that might foster

bancarization. Most important of which are the high and relatively

sustainable growth rate of GDP and the large population.

Still, some challenges remain to exist, most important of which

are the low literacy rate (65%) and high poverty rate (20%).

However, the successful bank reform program adopted since

2004, for which the positive outcomes have started to be clear,

represents an important catalyst for fostering the bancarization

process in the Egyptian economy.

Conclusions

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The data indicates an increase in the number of

branches and ATMs in Egypt.

However, this data is not indicative of the geographic

distribution which is generally concentrated in urban

areas.

Conclusions

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Significance of informal sector and tax evasion are major reasons for which

agents choose to be non bancarized. Estimates for informal sector ranges

between 35 - 40 % of the total economy.

Limited number of banks (4) are engaged in providing micro credit, either

through wholesaling to MFIs or through specialized windows.

SMEs still have limited access to bank finance. Credit facilities provided to

this sector totaled around (24 Billion L.E.) in September 2007. This

represents around 6% of the credit facilities provided by the Egyptian

banking sector totaling (361 Billion LE). However the launching of the

first credit bureau in Egypt, will facilitate access of SMEs to formal finance.

Conclusions

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Recommendations

Bancarization is not limited to the provision of banking

services, but it extends to ensuring the usage of these

services.

Banking institutions should be dynamic in responding to

client needs, and oversee the potential needs of each client

category and regional destination.

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The provision of banking services, needs to be enhanced by

the regulatory authority. Regulations that could have a significant

and positive impact on bancarization include:

Diminishing barriers to entry of new entities, specifically

those of a local and/or regional character, or specialized in

specific low-banked segments

Facilitating the expansion of the customer service network

in its different ways

Promoting diversifying channels to access banking

services.

Recommendations

The task of the regulator, should not only focus on facilitating access to banking

services, but also on making the use of such services easier for certain population

groups that are excluded.

In other words, narrowing the gap between the spectrum of possibilities and the

effective use of banking services, through :

Enhancing financial education and literacy

Ensuring transparency of financial data

compiling a database of information about client creditworthiness

Availing adequate safeguard of consumer rights

Business law, including bankruptcy and better enforceability of contracts

Better and more rapid property registration and collateral is needed

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Recommendations

Thank You

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