By Ryan Luikens News Focus Exodus Redux The terrorist attacks in Sinai have not hit tourism as hard as the ’97 Luxor massacre, but Israelis might not return anytime soon A New Attitude Reforms in the banking sector rest on mergers, privatization and a softening attitude on defaulters Up for Grabs Ten public companies will be put on the blocks, reviving a moribund privatization program Paint Thinner A subsidized turpentine shortage has brought the paint industry to a halt, raising tough questions for producers Fifty-Fifty The race between George W. Bush and John Kerrypromises to be a close one Exodus Redux The terrorist attacks in Sinai have not hit tourism as hard as the ’97 Luxor massacre, but Israelis might not return anytime soon Homecoming Six Egyptian telecom workers who were kidnapped in Iraq are now safe at home, but their abductions raise more doubts about doing business in Iraq A New Attitude Reforms in the banking sector rest on mergers, privatization and a softening attitude on defaulters Up For Grabs Ten public companies will be put on the blocks, reviving a moribund privatization program Paint Thinner A subsidized turpentine shortage has brought the paint industry to a halt, raising tough questions for producers Water Woes A jump in diesel prices is followed by an unexpected increase in the price of water Fifty-Fifty The race between George W. Bush and John Kerry promises to be a close one Taking Aim Worldwide, and now in Egypt, IBM is promoting Linux software to cut into Microsoft’s market share By Mohamed Allouba By Mohamed Allouba

By Sarah Mishkin and Jessica Gray

Mohamed Ahmed dreams of expanding his modest laundromat on the outskirts of Old Maadi. With as little as LE 10,000, he says he could open a second location, hire more employees and upgrade the aging washing machines he’s had for years.

However, financing an expansion with a bank loan is a non-starter for Ahmed, and many other small business owners. To qualify for a loan, he’d have to commit to a daunting interest rate and put up his business as collateral. If he defaults, Ahmed could lose his shop and bankrupt his family, risks he’s unwilling to take.

“I want to benefit myself and the community but most loans have high interest rates,” he says.

That could change in a few months. A new law before parliament could give millions of entrepreneurs access to microfinancing, the small loans that have been hailed as a miracle tool in the battle against poverty. The law would allow, for the first time, the creation of for-profit companies dedicated exclusively to micro-lending, drastically expanding a market that had been restricted to non-profit groups and a handful of commercial banks.

Experts say the law — a draft version of which was unveiled last month — could spur economic development at the grassroots level, which has largely been left out of the country’s six-year-long economic boom.

“Microfinance is a very important development tool, more so it’s a very profitable enterprise,” says Ranya Abdel-Baki, executive director of Sanabel, a pan-Arab network of microfinance organizations. In a country with a 40% poverty rate and almost 10% official unemployment, credit could be a key driver of economic development, she says.

Egypt trails many countries in the Middle East when it comes to the development of microfinance, a catch-all term that refers to everything from loans, to savings accounts, to low-fee money transfers, to insurance. Non-governmental organizations (NGOs) dominate the field but their reach is relatively limited because of a reliance on outside funding.

Only half of Egyptians who could benefit from microfinance have received loans for business ventures, according to a report published in January by Sanabel. Other reports estimate the number could be as low as 19%. (Over a million Egyptians have already received micro-loans from the four banks and 270 NGOs that currently offer them.)

Egypt’s microfinance law would create a new category of lender, regulated by the government, that exists somewhere between a non-profit group and a commercial bank. The companies, which must have at least LE 20 million in equity, will be able to offer loans up to LE 50,000 to entrepreneurs looking to start or expand small businesses. It’s expected to be a boon for the firms in the country’s informal sector, which employ the majority of the country’s workers but have difficulty getting loans from banks because they are not registered with the state.

Egypt has the largest potential for microfinance growth in the region, but a shortage of capital has slowed the industry’s expansion say experts. Most micro-lenders are NGOs that hand out an average of $100 per loan (LE 560).

“We’ve always known there was a huge gap in supply and demand,” says Abdel-Baki.

Drafted by the Egyptian Financial Supervisory Authority (EFSA), which also regulates the mortgage, insurance and capital markets, the new bill is designed encourage more lenders to enter the fray — especially those with access to commercial funding. It also aims to enshrine certain practices, such as registering borrowers with credit bureaus — including Egypt’s I-Score — and getting approval from the EFSA for each loan on offer and its subsequent interest rate.

“What we want to do is regulate a market and professionalize an industry that is already there,” says Ghada Waly, the EFSA’s advisor on microfinance. “When you increase the competition and diversify the providers, I believe that the long run will be better for the expansion [of the availability of credit] and cost of the loans.”

The competition, largely non-existent in today’s non-profit microfinance market, will push lenders to offer competitive terms, says Waly.

EQI, a Cairo-based consulting firm specializing in sustainable development, intends to get into the microfinance industry once the law has been passed, says managing partner Mounir Nakhla. The company has partnered with a local car importer to help entrepreneurs find financing for tuk-tuks, the three-wheeled taxis found around Egypt.

Tuk-tuks cost around LE 14,000, according to importer GB Auto, and in the absence of reliable credit for low-income borrowers, would-be drivers often pool funds with friends or take out an informal loan to cover the upfront investment. The potential untapped tuk-tuk market is substantial, Nakhla says, and the industry’s high profit margin ensures that microlenders can both create jobs and see their loans repaid.

Sanabel’s Abdel-Baki says European and Canadian pension funds, as well as a major Moroccan microfinance institution, have already done the necessary market research and are waiting on the law’s enactment to enter the local market.

Globally, microfinancing schemes have taken off. Investors have been entering the microfinance sector at an unprecedented rate, driven by the industry’s stable returns and by growing interest in socially-responsible investing.

A report from the World Bank found that foreign investment in microfinance in developing nations quadrupled to $5.7 billion (LE 31.9 billion) between 2004 and 2007.

Even Egypt’s neighbors are seeking to invigorate the practice of lending to the poor by changing it from a non-profit to a commercial activity.

In 2008, Syria licensed its first non-banking financial institution for micro-lending. This year, Yemen allowed microfinance institutions to accept savings deposits from clients. The Palestinian territories are waiting for presidential approval of regulatory changes that place micro-lenders under the territories’ banking regulator in an effort to make it easier for them to raise capital, according to Ghassan Kishek, operations manager for Sharekeh, a network of Palestinian microlenders.

Khaled Al-Gazawi, CEO of the non-profit First Microfinance Foundation based in Egypt, says his organization plans to become a for-profit microfinance company in order to expand its lending operation.

While he welcomes the law, he thinks it should go further and allow certified micro-lenders to offer savings accounts — something the government has flat-out refused.

“If proper guidelines are introduced [and] reserves are maintained at the Central Bank level, I think microfinance institutions should be encouraged to mobilize savings. Full banking services for the poor are usually neglected by the banking sector,” says Al-Gazawi.

His comments echo similar sentiments from the industry at large, but Waly says Egypt learned a difficult lesson in the 1960s and 1970s after unregulated investment companies conned thousands of Egyptians out of their savings.

This attitude may change in the future as micro-borrowers demand more services, says Aftab Ahmed, Citibank’s managing director for Egypt.

“They want remittances and transaction service support. They’re looking for savings support. They’re looking for foreign exchange hedges,” he says. While Citi doesn’t offer microfinance to its clients here yet, the bank did give Sanabel $450,000 (LE 2.5 million) to support its work in the region.

“The microfinance institution has gone beyond the NGO. There are a number of banks that have microfinance portfolios. It is now a sector that’s not just dependent on NGOs, but on a much broader cross section of players.”

While the law is still being discussed in Parliament, it could be passed in the coming months.

Banks and organizations that offer microfinancing, such as Bank Misr, Banque du Caire and the Lead Foundation, a homegrown NGO, will still be regulated by the Central Bank of Egypt and the Ministry of Social Solidarity, respectively. bt