commercial banking and microfinance in egypt: national ...and reduce poverty in egypt, remains...

Commercial Banking and Microfinance in Egypt: National Bank for Development

Case Study

Rahul Dhumale,Amela Sapcanin, and William Tucker

A study by the Regional Bureau for Arab States,

United Nations Development Programme,

in cooperation with the Middle East and North Africa Region,

World Bank

The authors are grateful to the United Nations Development Programme’s Regional Bureau for ArabStates for funding this study. They also thank Judith Brandsma and Nemat Shafik (World Bank)for invaluable comments and support. Finally, they are indebted to Mona Mubarak (National Bankfor Development) for her assistance during a visit to Cairo and for her cooperation throughout theproject. This report was edited by Paul Holtz and laid out by Wendy Guyette, and the cover wasdesigned by Laurel Morais, all with Communications Development Incorporated.

The findings and recommendations expressed in this report are entirely those of the authors andshould not be attributed in any manner to the United Nations Development Programme or the WorldBank.

iii

Contents

The potential for commercial banks in microfinance 1

Egypt’s recent strides—and remaining challenges 3

An improving financial sector offers opportunities for microlending 5

Microenterprises and their enormous role in Egypt’s economy 6

Who provides microfinance in the region? 8

The National Bank for Development’s microfinance program—a model for the region 10Objectives 11Target groups 12Credit methodology 13Financial results 14Leadership 20Career development and training 21

Making the move to microfinance 23

Annex Loans by the National Bank for Development’s Small and MicroenterpriseProgram 24

References 26

1

The potential for commercial banks in microfinance

Microfinance institutions providefinancial services—such as loansand savings services—to low-

income populations (see Fruman andGoldberg 1997). Because this industry hasonly recently emerged in the Middle Eastand North Africa, practitioners are in aunique position to shape the field, set stan-dards, and develop best practices thatreflect the features of countries in theregion. Presently, however, microentrepre-neurs in the region have limited access tofinancial services—more than 95 percent ofthe potential demand for microfinance isnot being met.

In Egypt a quarter of the population isconsidered poor by any standard, andanother quarter lives on the edge of pover-ty (Asaad and Rouchdy 1998). Still, thecountry contains at least 1.5 millionmicroenterprises, according to conservativeestimates. Yet even though Egypt’s microfi-nance programs provide far more loans thanthose of any other country in the region, just5 percent of the potential demand for suchresources is being met. Except for one com-mercial bank and one government program,all of Egypt’s programs are run by non-governmental organizations (NGOs).

The entrepreneurial poor in Egypt—andin the Middle East and North Africa in gen-eral—have limited options for financial ser-vices (USAID 1997). They tend to rely onself-financing or costly informal financing,such as rotating savings and credit schemes,supplier credits, and local moneylenders. Inaddition, government- and donor-subsi-dized programs cover some of the demand

for microcredit. But the shortfall in creditavailable to microenterprises, which havegreat potential to boost economic growthand reduce poverty in Egypt, remains sig-nificant. This deficit of loan funds alsoimpedes the government’s stated goals ofincreasing economic growth, expandingexports, creating jobs, and lowering infla-tion. Commercial banks could help increasethe supply of microcredit. Despite negativeperceptions, experience has shown thatcommercial banks can profitably offerfinancial services to the growing number ofmicrofinance clients.1

A recent survey of 206 microfinance inter-mediaries worldwide found that in manyparts of the world—unlike in the MiddleEast and North Africa and contrary to per-ceived barriers—banks are becoming majorplayers in microfinance (World Bank 1996).For a variety of reasons, banks appear wellsuited to lead this industry:• Their branch networks give banks a large

outreach capacity.• Their well-designed loan delivery mech-

anisms and well-established operationalprocedures could easily be tailored to theneeds of microentrepreneurs.

• They possess a readily accessible sourceof finance—their deposit base.

• Their capacity to offer diversified bank-ing services (such as loans, deposits, sav-ings, and other financial products) is, inprinciple, attractive to microfinanceclients.If they can modify their procedures in a

way that enables them to manage largemicrofinance programs, commercial banks

Commercial bankscan profitably offerfinancial services tothe growing number of microfinanceclients

can be successful in the microfinance indus-try (Baydas, Graham, and Valenzuela1997). They may also have to adapt certainbanking practices and tailor their financialmethodology to reach the poor. Micro-entrepreneurs need financial services thatare delivered conveniently and quickly. Asa result they are willing and able to pay apremium for continued and reliable accessto these services. Thus, in order to encour-age banks and other private actors to investin this industry, it is necessary to demon-strate the profitability of microfinanceand the existence of enormous marketdemand.

This report describes the microfinanceefforts of Egypt’s National Bank forDevelopment (NBD), the only commercialbank in the country that has established aseparate unit to provide financing to theentrepreneurial poor. The NBD offersmicroloans ranging from $300 to $1,500with maturities ranging from 3 to 11months. Clients usually start with smallerloans, then become eligible for largerloans depending on their repayment histo-ry. The interest rate is a flat 16 percent, anda 3 percent transportation fee is charged. Nocollateral is required. The program has18,800 active borrowers and $12.3 million in

outstanding loans. Most borrowers remain clients of NBD for

a long time, indicating that microentrepre-neurs need continued access to reliablemicrofinance services—services for whichthey are willing to pay a premium. This reportreviews the microfinance industry in Egyptand analyzes the NBD’s microfinance pro-gram. It shows that commercial banks candeliver financial services to the poor on aprofitable—and hence, sustainable—basis.The main requirements for success are a staffincentive system, good client relations, andeffective management and training.

Note

1. Commercial banks often perceive smallentrepreneurs as being less attractive cus-tomers because of smaller profit potential, high-er lending costs, and higher risk. In addition,dealing with a large number of widely dispersedenterprises is more demanding—both in termsof time and effort. Borrowers may not be easilyaccessible, and bank personnel tend to be sep-arated from the clients by differences in lan-guage, literacy, and culture. Except for theNational Bank for Development (NBD),Egyptian commercial banks shy away frommicroenterprise lending.

2 COMMERCIAL BANKING AND MICROFINANCE IN EGYPT: NATIONAL BANK FOR DEVELOPMENT

Microentrepreneursneed continued

access to reliable microfinance

services—servicesfor which they are

willing to pay a premium

3

Egypt’s recent strides—and remaining challenges

Since the early 1990s Egypt has madeconsiderable progress in achievingmacroeconomic stability. Between

fiscal 1991 and 1997 inflation droppedfrom 21 percent to 6.2 percent (table 1),and the fiscal deficit dropped from 18 per-cent to 0.8 percent. Tight monetary con-ditions have been maintained, with boththe current and capital accounts achievingsurpluses. The balance of payments is insurplus as well.

To build on the success of stabilizationmeasures, structural reforms have privatizedvarious sectors, reformed the financial sec-tor, deregulated various activities, improvedtax and civil service procedures, and liber-alized trade and the exchange system. As aresult real GDP growth has reached 5 per-cent, the country has better access to inter-national capital markets, private sectorinvestment has increased, and local stockmarket activity has surged (El-Erian andFennell 1997).

Despite fluctuations in oil prices and theuncertainties resulting from the Asian crisis,Egypt’s economy has shown remarkableresilience. Yet the country faces several chal-lenges. Savings and investment rates willhave to rise from their current 18 percentto 23–25 percent in order to increase GDPgrowth to 6–7 percent—the level estimatedas being required to reduce unemploymentand address other pressing social problemsfor the country’s nearly 60 million people(Economist Intelligence Unit countryreport). Given that official estimates ofunemployment are about 10 percent—andunofficial estimates hover between 15 and

20 percent—Egypt will have to increase joband income opportunities to meet the ris-ing expectations of its young and growingpopulation.

A range of measures is needed to narrowthe wide gap between the rich and thepoor. The living standards of the poor havedeteriorated substantially since most sub-sidies were eliminated in 1991. In the mid-1990s estimates of the population livingbelow the poverty line (the headcountratio) ranged from 12 to 23 percent usinga lower poverty line, and from 23 to 48 per-cent using a higher poverty line. Womenand children are among the most vulner-able groups. In addition, poverty has aregional dimension: most of the poor areconcentrated in the rural areas of five gov-ernorates in upper Egypt, and in the squat-ter and informal settlements of the largestmetropolitan areas (Asaad and Rouchdy1998). In rural areas the poor are eitherfarmers with little or no land, or agricul-tural laborers. In urban areas poverty is

Table 1. Economic and social indicators forEgypt, 1996–97

Indicator Amount

Population (millions) 59.7Annual growth rate (percent) 2.0

Labor force (millions) 17.3Annual growth rate (percent) 2.7

GDP (billions of U.S. dollars) 50.9Annual real growth rate (percent) 5.0

Unemployment (percent) 10–22Inflation (percent) 6.2Average exchange rate (LE/$) 3.39

Source: Central Bank of Egypt Annual Report 1996/1997;Economic Review 37(4); IMF staff estimates.

associated with industrial employmentand services, including a large number ofgovernment employees.

In this context microfinance could be apowerful development tool, contributing toprivate sector–led growth. The main func-tions of microenterprise—promoting pro-

ductive investments that generate incomefor poor households—are closely correlat-ed with one of the main objectives of micro-finance—alleviating poverty by generatingincome and creating jobs. But can the coun-try’s financial sector adapt to the needs ofmicroentrepreneurs?


5

An improving financial sector offers opportunities for microlending

In June 1997, 64 banks were registeredwith Egypt’s Central Bank. Of these, 28are commercial banks (4 of which are

state-owned), 32 are business and investmentbanks (all of which are private), and 4 arespecialized banks (all of which are state-owned). This system has the infrastructureand financing capacity to reach thousandsof potential borrowers—together these 64banks have 2,325 branches (table 2). In addi-tion, the postal savings system has more than2,900 outlets to reach the poor.

Substantial liberalization of the financialsector has been under way since 1991. Creditcontrols have been eliminated. Interest ratesand foreign exchange regimes have been lib-eralized. Modern banking regulations andtreasury bill auctions have been intro-duced. And the domestic stock market hasbeen revitalized, placing Egypt among thetop five emerging markets. Financial sectorreforms have developed indirect instru-ments for controlling liquidity and man-agement and have made domestic financialassets more attractive—efforts that couldhelp diversify banking activities and expandmicrofinance as well.

Opportunities exist to further deregulateEgypt’s banking sector. The state continuesto play too large a role in Egypt’s financialsector (table 3). Moreover, banks are for-

going potential profits by ignoring microen-terprises and small enterprises, which gen-erate a significant portion of the nation’svalue added and most of its employment.

Table 2. Egypt’s banking system, June 1997

Number of Type Ownership branches

Commercial banks 4 public banks 88324 private and joint venture banks 298

Business and investment banks 11 private and joint venture banks 9021 offshore banks 42

Specialized banks 1 industrial development bank 142 real estate banks 221 principal bank for developmentand agricultural credit 976

Total 64 banks 2,325

Source: Central Bank of Egypt banking survey, 1996/97.

Table 3.Assets, deposits, and loans in Egypt’s financial system, June 1997

Amount Public share of Indicator (millions of Egyptian pounds) total (percent)

Assets 261,118 61.8Public commercial banks 146,650 56.0Public specialized banks 15,303 5.8

Deposits 174,858 67.4Public commercial banks 113,655 64.0Public specialized banks 5,860 3.4

Loans 128, 826 64.8Public commercial banks 70,788 55.0Public specialized banks 12,632 9.8

Source: Central Bank of Egypt banking survey, 1996/97.

6

Microenterprises and their enormous role in Egypt’s economy

Akey distinction between microen-terprises and small enterprises isthe degree of interdependence

between the household economy and thebusiness activity. In microenterprises it is dif-ficult to separate the household economyfrom the business activity. The economicdecisions of the household play a major rolein the economic decisions of the microen-terprise, and the economic decisions of themicroenterprise play a major role in theeconomic decisions of the household. Insmall enterprises the dividing line is moreclear-cut. Thus microenterprises can bedefined as productive activities that gener-ate income for poor people and theirhouseholds. Together with household activ-ities, they are a means through which thepoor subsist from year to year as well as ameans to protect against unexpected eco-nomic shocks.

As noted, Egypt contains at least 1.5 mil-lion microenterprises, although this officialestimate may fall far short of reality becauseit does not include underage employees oritinerant workers. The owners of these enter-prises live near or below the poverty line. Itis estimated that microenterprises andsmall enterprises account for more than 98percent of the economy’s private nonfarmestablishments. Government estimates indi-cate that microenterprises represent 93 per-cent of the private sector and account for 52percent of private employment (Ministry ofEconomy 1998).

Most of these enterprises are quitesmall and informal, in that they are eitheronly partly or not at all licensed.1 They gen-

erally provide work only for the owner anda few employees—usually family mem-bers. In most cases capital does not exceedLE 10,000 (about $3,000). The size ofmicroenterprises in Egypt is a function ofhighly competitive local markets. Even ifentrepreneurs were to receive intensivetraining and have adequate access to finan-cial services, only a few might becomedynamic, steadily growing businesses. Mostof these enterprises need funds for workingcapital, whether to replace an existing (pos-sibly expensive) informal source of capital

Microenterprisesrepresent 93

percent of the private sector and

account for 52 percent of private

employment

Ahmed is a young entrepreneur in his early30s. He manufactures protective gloves andbody suits. He has been borrowing from theNBD’s microcredit program since April 1996,taking out four loans in the range of LE1,000 to LE 5,000 ($300 to $1,500). Theloans have been used to buy two new sewingmachines, which have doubled his produc-tion capabilities; he is now able to supply fouror five wholesalers instead of two. The loansare also used to buy raw materials and paysalaries; as a result his family-run businesshas grown from 5 to 10 workers. During dis-cussions he spoke of expanding his two tinyrooms into three—the workshop next doorcaught his eye, and he has approached anNBD loan officer with his plans and receiveda preliminary approval. He makes a $0.15profit on each pair of gloves and sells up to4,000 pairs a month. He prefers to use hisprofits to restock inventory, rather than tokeep “money as money.”

or to enhance existing capital to expandoperations. Most of the needed financingis short term, involving maturities of 6–12months. However, borrowers tend to applyregularly for new loans, and so they buildup a long-term relationship with the finan-cial intermediary—as has been the case withmicroloans and small loans provided by theNational Bank for Development, several

business associations, and other microfi-nance programs.

Note

1. This study defines microenterprises asestablishments with fewer than 10 employees andrequesting loans of LE 500 to LE 19,000 ($150to $5,600).

MICROENTERPRISES AND THEIR ENORMOUS ROLE IN EGYPT’S ECONOMY 7

8

Who provides microfinance in the region?

Several models areused to provide

financial resourcesto the

entrepreneurialpoor

Egypt’s microfinance providers servenearly 75,000 borrowers and haveabout $55 million in outstanding

loans (Brandsma and Chaouali 1998). Still,95 percent of potential microfinance bor-rowers are not being served. The averageloan ranges from $200 to $1,500.

Several models are used to providefinancial resources to the entrepreneurialpoor. NGOs, the predominant source ofmicrofinance, offer an alternative to com-mercial banks, especially for loans tomicroenterprises and small enterprises (fig-ure 1). NGOs receive financial support from

a number of international donors and pri-vate foundations.

Government-subsidized interest ratesare used for loans granted by the SocialDevelopment Fund, which is supported pri-marily by the World Bank and the EuropeanUnion. Public banks account for more than87 percent of the fund’s use. Because thefund is focused on creating new small enter-prises, average loans are somewhat higherand for longer periods than under otherprograms.

Finally, microfinance units of commercialbanks—such as the National Bank for

Figure 1. Microfinance industry in Egypt, 1998

0 5,000 10,000 15,000 20,000

UN–Program Q

NGO–Program P

NGO–Program O

NGO–Program N

NGO–Program M

NGO–Program L

NGO–Program K

NGO–Program J

NGO–Program I

NGO–Program H

NGO–Program G

NGO–Program F

NGO–Program E

NGO–Program D

NGO–Program C

Government–Program B

NBD–Program A

Source: Brandsma and Chaouali 1998.

Number of active borrowers

Institutionaltype

Development—have received support fromthe U.S. Agency for InternationalDevelopment, though the NBD is nowfinancing program growth with its ownresources. The NBD’s operation (“programA” in figure 1) has the largest number ofactive borrowers. Although several NGOs inEgypt manage their loan portfolios incooperation with local banks, the NBD is theonly commercial bank with a microlendingunit. Moreover, it relies on microfinance bestpractice techniques.

The average outstanding loan of theNBD’s microfinance program is slightlylower than the average for all microfinanceproviders in Egypt. Still, the NBD’s averageoutstanding balance is at least three timesthe poverty line of $200—despite the factthat the program operates in areas that areoverwhelmingly poor (such as the upperand lower Egyptian governorates and thesquatter areas of greater Cairo). Initial aver-age loans to first-time borrowers are closerto the poverty line, however.

WHO PROVIDES MICROFINANCE IN THE REGION? 9

10

The National Bank for Development’s microfinance program—a model for the region

The NBD was incorporated in 1980 asan Egyptian joint stock companywith capital of $15 million. By the

end of 1997 the bank’s assets had risen to$1.7 billion and its capital base was $71 mil-lion (4 percent of total assets; table 4). InDecember 1997 the bank had almost $950million in outstanding loans (net of provi-sions). The NBD has about 20,000 share-holders, including individuals, companies,and other organizations. As a full-servicecommercial bank, the NBD provides arange of services through its 66 branches,which are spread throughout Egypt’s gov-ernorates. Over the years the bank hasestablished nearly 65 joint stock companiesoperating in various sectors of the econo-my, including food, tourism, financial ser-vices, and housing. Today these companiesare worth $195 million.

In 1987 the NBD began to recognize thepotential role of microenterprises and smallenterprises in the Egyptian economy. Thebank realized that providing loans to theseborrowers would not only combat poverty butalso create jobs in this frequently overlooked

segment of the population. Moreover, simi-lar microlending programs elsewhere hadrecorded high levels of repayment. Seniormanagement realized that the bank could notonly generate profits from microfinance—though on a smaller scale than in its con-ventional commercial operations—but alsohelp alleviate poverty in Egypt.

Working with the U.S. Agency forInternational Development (USAID), theNBD established a Small and Micro-enterprise Division and started microlend-ing in four of its branches in 1987. In 1993USAID and the NBD increased to 13 thenumber of branches engaged in microlend-ing in the greater Cairo area. USAIDagreed to cover the administrative costs andoperating expenses of this program, andcapitalized a revolving credit fund of $11 mil-lion. Once it broke even on its expenses, the

The NBD recognized that

microfinance couldnot only generate

profits, but alsoalleviate poverty

Table 4. Balance sheet of the National Bankfor Development, 1997(millions of U.S. dollars unless otherwise noted)

Indicator Amount

Assets 1,765Capital 71Deposits 990Outstanding loans (net) 946Investment securities 323Return on equity (percent) 5

Source: NBD balance sheet, June 1998.

Rabbia first applied for an NBD loan of LE1,500 ($450). Since then he has taken 12loans to reach the maximum amount grant-ed under the NBD’s microcredit program (LE10,000). Rabbia’s microenterprise fashionstin sheets into air conditioning vents andcovers; his main clients are hospitals andmovie houses. Of the eight employees in hisworkshop, four are family members. Rabbiaused his first loan to buy raw material: sheetsof tin metal. Subsequent loans were used tobuy $5,000 metal-turning machines. Futureloans will continue to finance the purchaseof raw materials and be used to expandRabbia’s second workshop.

NBD contributed LE 10 million ($3 million)of its own funds to the microcredit fund.

Objectives

The NBD’s microcredit program has diverseand ambitious objectives. In the short run ithopes to provide access to credit to microen-terprises and small enterprises that wouldotherwise be ignored by conventional banks.In the long run it hopes not only to createjobs by extending credit but also to helpthese small borrowers become clients undermore conventional banking standards.

Unlike routine bank loans, the NBD’smicrocredit program has several socialobjectives. In many cases, for example, theincome from a microenterprise represents ahousehold’s total income. Thus suddenphysical calamities to any member of thehousehold may be more relevant than usualwhen considering a new repayment schedule.The ultimate aim of the NBD program is toimprove the quality of life of small borrowerswhile teaching them how to increase controlover their financial resources. The programpromotes employment generation, self-employment, the preservation and expansionof existing activities (particularly in the craftsindustry), and better accounting, book-keeping, and credit management.

The NBD’s program is one of the fewmicrocredit programs in the Middle Eastand North Africa that is conducted througha commercial bank. The program’s successmay encourage other commercial banks inthe region to pursue similar endeavors(table 5; see also the annex).

In December 1997 the NBD’s microcre-dit program had $12 million in outstandingloans—less than 1.3 percent of the bank’soverall outstanding loan portfolio and sim-ilar to the amount that USAID established

THE NATIONAL BANK FOR DEVELOPMENT’S MICROFINANCE PROGRAM—A MODEL FOR THE REGION 11

The NBD’s microcredit program hasdiverse and ambitious objectivesZaynab and her husband do not have chil-

dren, but they are raising the children of herdeceased brother. Before taking an NDBmicroloan, Zaynab was well known in herneighborhood for the skillful sewing she didat home, but she could not take on largerorders because she could not afford the fab-ric. Her first loan of LE 500 ($150) came inNovember 1995. Her most recent loan, theseventh from the NBD’s microcredit program,was LE 4,000 ($1,200). Today Zaynab sewsdresses and hems sports and other active wear.She began by herself and now employs oneother seamstress. Her raw materials consistof rolls of fabric and stripes, as well as otherfashionable fabric for dresses. She can produceup to 150 pieces a day and earns $0.60 to$0.90 a piece. Zaynab is not interested inhaving a workshop outside her home, but shewould like to increase her productivity by buy-ing hemming machines and employing sev-eral of her neighbors on a type of leasearrangement. She has discussed her planswith her loan officer and has received a pos-itive response. Zaynab emphasizes thatnone of her achievements would have beenpossible if she had not been given the oppor-tunity to borrow. She is constantly encour-aged by the demand for her product, and feelsthat the program has greatly improved thequality of her family’s lives and increased eco-nomic security.

Table 5. Basic data on the National Bank for Development’smicrocredit program, June 1998

Indicator Amount

Total number of disbursed loans 188,000Total amount of disbursed loans $131 millionRepayment rate on disbursed loans (percent) 99.2Number of loans disbursed to women 13,522Share of women in total loans (percent) 13.5Number of current active borrowers 18,800Current outstanding loan portfolio $12.3 millionAverage loan size $896Average outstanding loan balance $654Revolving of loan fund 2.4 times a yearSectoral distribution of loans (percent)Production 22Services 17Commercial 37Investment 24

Total number of savers 16,564Total savings $1.76 million


as a revolving credit fund with the bank in1989. As can be deduced from theseamounts, the NBD has managed to active-ly participate in lending to microenterpris-es without investing too much of its owncapital. And, as is shown later, the programis highly profitable. In hindsight, USAIDmay have invested too much, not only inloan funds but also in the costs of operationsand institutional development until theNBD broke even. But this investment wasprobably an essential “ice breaker” for themicrofinance industry in the Middle East.1

And as noted, the NBD is now using its owndeposit base to finance the growth of themicrocredit program.

The program has nearly 19,000 borrow-ers and an average outstanding balance perborrower of $654, with an average loan termof five to seven months.2 The small size ofloans and their brief maturity indicate thatthe NBD’s program is reaching microen-terprises. Moreover, data for the NBD’s pro-gram are comparable to those formicrocredit programs in other countries.

The NBD’s main comparative advantageis its potential for expanding the breadthand depth of its outreach through its exten-sive branch network and adaptive approachto clients. The bank has 66 branches, ofwhich 33 have implemented the microlend-ing program. One of the NBD’s unique fea-tures is its mobile banking services.Minivans—with a driver (who also serves asa security guard), tellers, and loan officers—visit areas in Cairo where the bank does nothave branches. These mobile branches col-lect repayments, disburse new loans, reviewapplications, and conduct all other businessnormally carried on in their regular branchoffices. Mobile branches enable the bank toget to know its clients while combining thediscipline of commercial banks with the out-reach of NGOs.

The loan officers interviewed often citedtheir clients’ initial surprise and disbelief inlearning that the bank had come to them,rather than vice versa. At first promoting theproject and selling it to potential clients was

a large part of the daily work of the loan offi-cers. This is a good example of how the NBDhas tried to provide credit to those normallyexcluded by conventional banking channels.

Target groups

The NBD’s program aims to address thecredit needs of small borrowers, artisans, andother entrepreneurs neglected by conven-tional banks. The NBD also extends creditto informal groups and enterprises withoutproof of registration. The most importantfactors in the loan decision are the eco-nomic viability of the enterprise and theintegrity of the borrower. Bankable collateralis not required. Borrowers do, however, haveto sign a promissory note obliging them torepay the loan. And, as noted, the programstresses the importance of timely repayment.

The NBD focuses on financing income-generating activities undertaken by indi-vidual entrepreneurs from the informalsector. Loans are provided to owners ofexisting enterprises that, in the words ofone of the loan officers interviewed, havean “outstanding reputation.” Following pro-gram guidelines, no loans are provided tostart up new microenterprises. Clientscome from a range of activities in trading,productive, and service sectors. Micro-enterprise owners include blacksmiths,electricians, bakers, spice retailers, potters,tailors, metal painters, and shoemakers.Activities generally include light manu-facturing and assembly, maintenance,transport, storage and distribution, andagricultural product processing andmarketing.

NBD statistics for a sample of branchesshow 76,660 repeat loans for a total of LE251,572,974 ($74.2 million). This represents71 percent of the total value of loans dis-bursed within the program and about 10loan cycles.3 All the clients interviewed forthis report were repeat borrowers, havingobtained between 2 and 12 loans. Asnoted, continued access to microfinance isessential and sought after.


The NBD’s maincomparative

advantage is itspotential for

expanding thebreadth and depth

of its outreach

Most of the borrowers interviewed are inthe informal sector, and businesses are usu-ally conducted from their homes. In oursample only one borrower had more thanone workshop, although in almost everycase owners were looking to expand. Loanvalues range from $150 to $3,000, which isthe limit under the NBD’s microfinanceprogram. Many borrowers’ relationshipswith the bank stretched over several years,starting from those who joined the programin 1993. All clients look forward to largerloans in order to be able to produce moreand hire more workers. Employees in theenterprises visited typically included extend-ed or close family members and a few out-side workers, with the total number ofemployees ranging from 2 to 12. Despitehigh competition, most borrowers believedthere was sufficient demand for their ser-vices to warrant expansion to at least anoth-er workshop.

Most borrowers continue borrowingbecause the loans provide them with theliquidity needed to keep their businessesrunning. Moreover, most borrowers rein-vest 60–80 percent of enterprise profits.The rest is used for household needs andsavings. In summary, NBD clients, who oth-erwise would not be considered bankablein commercial terms, depend on the pro-gram for initial and continued access tofinance.

Credit methodology

Loan approval

After the loan officer and the client agreeon the maturity and repayment schedule ofthe proposed credit—interest rate, fees, andsavings requirements—various documentsare sent to the branch supervisor or man-ager for final approval. If the loan isapproved, the loan officer contacts the bor-rower and arranges to collect the manda-tory savings deposit. In addition, theborrower must sign a promissory notebefore the final disbursement occurs. If theloan application is rejected, the loan officercontacts the applicant and explains why.Overall, the entire process takes less thantwo weeks.

Savings accounts

Savings are mandatory because the NBDaims to encourage its borrowers to adoptbetter methods of managing financialresources. As a precondition to loanapproval, applicants must deposit anamount equivalent to 10 percent of the valueof the loan requested into an interest-bear-ing savings account at the NBD. This ges-ture, in both symbolic and practical terms,demonstrates to the NBD that borrowers arewilling to commit to the goals of the pro-gram. Moreover, the bank believes that itmakes borrowers better educated aboutimportant financial practices, which is con-sistent with the program’s goals. Borrowers


NBD clientsdepend on the program for initialand continuedaccess to finance

Salah-a-Din, who has a family of 10, ownsa small workshop that plates metal and oxi-dizes door and window handles. He heardof the NBD microcredit program after sever-al of his neighbors applied for loans. InAugust 1993 he took his first loan, for LE1,000 ($300), and after nine loans reachedLE 5,000 ($1,500). Salah-a-Din is a goodexample of “learning by doing,” as he taughthimself his trade. Before joining the programhe had no electricity and had to perform sometasks manually; with the NBD’s first loan hewas able to buy a generator. Today he ownstwo generators and has increased his revenuesby 60 percent. Moreover, he now has fiveemployees and his goods are being exportedthrough wholesale distributors. Salah-a-Din stresses that the loans gave him the liq-uidity he needed for his business. He hasdoubled his existing capital, and in the pastfew months his average profits have reachedalmost 100 percent. He plans to expand,because the demand for his products is high,and he intends to apply for new loans.

earn up to 8 percent on these deposits and,after their loan is settled, they are free tochoose how to use their savings. Finally,because borrowers often do not have bank-able collateral, mandatory deposits reducethe NBD’s risk exposure. Since the programbegan, microborrowers have depositednearly $2 million in savings.

Best practice microfinance, however,suggests that mandatory savings may not bethe most effective way to educate borrow-ers. By definition, borrowers have limitedcash, which is why they are requesting aloan. And although there is significantdemand for savings products in the areaswhere microenterprises operate, thisdemand generally comes from house-holds who simply want a safe and conve-nient place to deposit excess liquidity.Finally, mandatory savings mechanisms gen-erally capture less savings than the out-standing microloan portfolio—as has beenthe experience of the NBD. By contrast, vol-untary savings captured by microfinanceinstitutions often exceed the outstandingmicroloan portfolio—as has also been theexperience of the NBD (table 6).

Loan monitoring

Once a loan has been disbursed, loan officersbegin monitoring and collecting the periodicinstallments. Loan officers initially visit bor-rowers every week. The purpose of these vis-its is not solely to collect repayments: theNBD sees the weekly visits as part of an ongo-ing exchange of information. Borrowers canlearn about banking and saving and obtainadvice on how to make their business moreefficient. This approach demonstrates the

NBD’s commitment to borrowers’ needs andits desire to promote financial discipline.Close supervision of repayments enables theNBD to identify delinquent borrowers with-out delay. Traditional collection proce-dures are used to recover loans—including,when necessary, legal action.

Financial results

At the behest of the U.S. Agency forInternational Development and as part of aproject assessment, a financial analysis of theNBD’s microcredit portfolio was carried outin the first quarter of 1996 (Tucker 1996).At that time the NBD had just changed thesenior management of the small enterpriseand microenterprise program, and its oper-ations were going through a period of assess-ment and adjustment. The analysis madetwo important conclusions about the NBD’smicrocredit operations:• Scale of operations. The bank had demon-

strated impressive institutional capability,generating a microcredit portfolio ofabout $10 million in a short period. Thisoutcome was achieved primarily by imple-menting the program in 13 bank branch-es in the greater Cairo area. During 1995,however, growth in the loan portfolio halt-ed then declined slightly as the bankadjusted operational requirements formeeting the credit needs of thousands ofsmall borrowers. Such a slowdown is notunusual given the adjustment that theprogram experienced.

• Profitability. The bank’s operationsreached the break-even point relativelyquickly. Of the 13 branches managingmicroloan portfolios, many had not yetreached the break-even point. But thefew larger and more successful branch-es were generating enough profit tocover the operating losses of the slower-growing branches. Although operationswere breaking even, the overall prof-itability of the program was stagnant in1995, with a profit margin (net resultdivided by income) of 3 percent. Still,


Close supervisionof repayments

enables the NBDto identify delinquent

borrowers withoutdelay

Table 6. National Bank for Developmentdeposits and loans, 1996–97(millions of Egyptian pounds)

Indicator 1996 1997

Customer deposits 3,367.3 4,096.6Loans to clients 2,608.8 3,158.1


compared with the pretax profit of banksin other countries—0.49 percent in theUnited Kingdom, 0.99 percent inLebanon, 1.29 percent in the UnitedStates, 1.39 percent in Greece, 3.56 per-cent in Turkey (OECD 1994)—this fig-ure is quite acceptable. At the time theprofit margin of the NBD as a whole was5 percent.According to NBD data, the situation has

improved considerably since this analysis.For example, the outstanding loan portfo-lio of the 13 branches analyzed in 1996 hasgrown considerably (figure 2).

An analysis of a microcredit program’ssustainability within a commercial bank mayrequire different approaches than thoseusually applied to nonprofit microfinanceinstitutions. Full financial sustainability,for example, must take into account theinstitution’s equity. As the following mater-ial shows, bankers can and often do analyzetheir operations in different ways. As withthe assessment carried out in 1996, thisreport has assessed the financial results ofthe microcredit program in terms of its con-tribution to the overall profitability of theNBD. Specifically, satisfactory performancecould be defined as a profit margin greaterthan or equal to the bank’s overall profitmargin. If the microlending operationgenerates a higher profit margin than thatreported by the bank in its audited financialstatements, the program may be deemed afinancial success. This orientation limits theassessment to the income statement of theprogram. It is worth noting, however, thatthe microcredit program has been success-ful enough for the bank’s chairman toexpand it throughout the bank’s network of66 branches.

The following analysis assesses the prof-itability of the NBD’s microcredit programby itself but also compares it with the bank’sother activities. Revenues and costs are usedto determine profitability. Revenues includeinterest and fee income. Costs include costof funds (including equity), operatingexpenses (including depreciation), staff

compensation and incentives, loan loss pro-visions, and overhead.

Revenue

Total revenue for the NBD’s microlendingprogram is determined by direct and indirectsources.4 The two main sources of direct rev-enue are a flat 16 percent annual interest rateand a flat 3 percent annual transportationfee.5 The transportation fee covers part of thecost of mobilizing loan officers. For a six-month loan the equivalent annual percent-age rate of these two fees is 31.88 percent.Payments for interest and fees are spreadequally over the time to maturity and thenpaid weekly. Principal installments are paidaccording to the activity of the borrower. Thespread between the cost of funds for the NBDand the price at which the bank markets theseloans covers the risk inherent in lending aswell as the direct and indirect administrativecosts encountered by the NBD.

The three main sources of indirect rev-enue are a life insurance fee, a penalty fee,and prepayment.6 The NBD provides lifeinsurance coverage to all microborrowers, toprotect them from unforeseen risks or unex-pected adverse conditions that might threat-en their business and cause a loan default.In case of a calamity, the NBD takes over theborrower’s loan and provides the benefi-ciaries with up to $120 for funeral and bur-


The NBD’s program is beingextended throughout its network of 66branches

Figure 2. Outstanding loan portfolio at 13 NBD branches in Cairo,1995–98Millions of Egyptian pounds

19981997199619950

25

50


ial expenses. The life insurance fee is a flat4.75 percent a year of the principal amount.As with other fees, payments are calculatedinto the weekly interest installments.

The penalty fee is 0.5 percent a month (6percent a year) of the principal amount. Aswith other fees, this payment is calculatedinto the weekly interest installments. Afterborrowers make their final payment, theyreceive a refund of the penalty fees paid—unless they missed a payment and incurreda penalty charge. In that case the penaltycharge is subtracted from the penalty feespaid and the balance is refunded.

If a borrower prepays any installment, theNBD refunds or recalculates overpaid inter-est (equal to 65 percent of the amountremaining to be paid during the maturityperiod).

Revenue for the first seven months of 1998was about LE 7,011,000 ($2,062,000).Assuming comparable results for the rest ofthis year, annual revenue will reach $3.5 mil-lion. Although the microlending programrepresents only 1.3 percent of the NBD’s totalloan portfolio, revenue from the program mayaccount for more than 3 percent of the bank’stotal interest and fee income this year—oneindication of the program’s profitability.

Cost of funds

As was the case in 1996, the bank’s microlend-ing operation does not monitor its cost offunds. The 1996 profit margin of 3 percentwas calculated from an internal transfer-pricecost of funds for each branch, which at thattime was defined by the NBD as 11 percent.This cost of funds was applied to theresources that had been transferred to thebranches that were implementing themicrolending program. This transfer pricemay be considered high. World Bank datashow that in 1996 the average cost of funds(including the cost of equity) of private banksranged from 7.29 to 7.51 percent. The aver-age costs of funds (including equity) of pub-lic banks ranged from 8.36 to 9.33 percent.The treasury bill rate was about 9 percent.

A similar, though less precise, approachwas used for this analysis. Specifically, theNBD’s overall commercial cost of funds wasapplied to the outstanding microloan bal-ance. The bank indicated that its cost offunds had declined slightly, to 10 percent.And as noted, its outstanding loan balanceis about LE 41.8 million ($12.3 million).Thus the estimated annual expense is LE4.18 million. For the first seven months of1998, then, the annual expense was LE 2.44million. This represents 34.8 percent of allrevenues. Put another way, it means that forevery LE 100 that the microlending pro-gram generates in revenue, it must set asideLE 34.8 to cover the cost of the funds ituses.


Revenue shouldreach $3.5 million

in 1998

Khadra took over her husband’s cosmeticsworkshop after he died. She took her firstloan from the NBD’s microcredit program in1995 for LE 2,000, and followed it withfour others. Khadra used her deceased hus-band’s “secret formula” to expand into anentire line of cosmetics; today she producesnail polish, hair gels, lotions, lipsticks, andfacial creams. One of the main expenses inher production process is the cost of con-tainers, such as nail polish bottles and lip-stick tubes, which she uses her NBD loansto buy. She recently managed to purchase herraw materials locally, which greatly reducedher costs. Her revenues are seasonalbecause most of her products are popularwith students, who can only wear suchproducts during holidays and special occa-sions. Khadra earns an average of 5 centsper bottle, and during the high season shecan sell up to 1,200 bottles. She nowemploys four to six workers and is hopingto renew her factory with new loans. She haseven been approached by the largest localproducer of cosmetics to start a new prod-uct line. She wants much larger loans, asshe believes she could expand her work muchfaster than with the smaller loans availableunder the NBD’s program.

Operating expenses

On 31 December 1997 the NBD had 2,818employees, with total salaries of LE 18 million(NBD Annual Report 1997). The microlend-ing program has 390 staff members, or 14percent of the bank’s staff. This includesalmost 160 loan officers—99 of whom workin the 13 donor-supported branches and han-dle an average of 107 outstanding loans, withan average outstanding portfolio of LE325,930 ($95,862) per officer and an averageof 14 new loans each month. Some 118members of the microlending unit arewomen, but few work as loan officers. This isexplained by the intensity of work, whichdemands long working hours and conflictswith family obligations that female officersfind difficult to overcome. In the branchesthat target women, however, a majority ofloan officers are women. Given that 14 per-cent of the NBD’s staff manages just 1.3 per-cent of the bank’s outstanding loan portfolio,microfinance is clearly a labor-intensiveactivity for the banking sector.

In the past loan officers were hired onshort-term, temporary contracts. Now all theofficers have been converted to bank staff,with the benefits that come with permanentpositions. Some NBD managers believe thatthe former approach to employment waspreferable because it made it easier to han-dle the problems that may occur with loanofficers.

Most loan officers are university graduateswith a degree in commercial studies,accounting, or computer science. TheNBD recruits young graduates to be loanofficers because of the demands that thiswork poses. It is a very laborious activity,requiring staff to learn how to deal with dif-ferent types of clients and to manage loanson a cash-flow basis. In the branch visited inCairo, however, most of the loan officers hadbeen with the program since it was createdin 1993, indicating low turnover.

In contrast, in branches where the NBDhas invested its own onlending funds, staffhas assumed responsibility for microfi-

nance activities. These loan officers are paidon a performance-based reward system andusually work on the microlending programafter official hours. Like other loan officers,they review applications at borrowers’homes, issue credits, and collect repayments.Initial results are encouraging.

Staff compensation and incentives

Salaries, including incentives, for loanofficers range from LE 300 to LE 600 ($88to $177). On average, half of this income isbase salary; the other half is earned incen-tives. Given the intensity of the work, thebase salary may not be fully commensuratewith loan officers’ efforts. But according toNBD management, none of the loan offi-cers has chosen to work in activities outsidethe microfinance program. Despite thehardships of the work, the possibility ofearning extra pay motivates many officers.Incentives are based on the rate of loan col-


Abdel is a carpenter who enjoys a good rep-utation in Zawiyya, a neighborhood ingreater Cairo famous for its carpentryindustry. He applied for his first microloanfrom the NBD in May 1995, for LE 5,000(about $1,500). He quickly reached the max-imum LE 10,000 (about $3,000) availableunder this program with six additional loans,which he used for working capital. Abdel’sbusiness has grown 70 percent since he joinedthe program: he has opened two new work-shops, is about to open a third, and now actsas a distributor. He has “graduated” tobecome a regular bank customer and is nowapplying for a regular NBD loan for LE250,000 (about $73,700) to support hispartnership in a large wire factory in anindustrial Cairo suburb. This new financialstatus will bring much larger loans and lowerinterest rates. Abdel emphasizes that the mainreason he has managed to enter into this part-nership is the fact that he was able to receivemicrofinance loans.

lection and loan disbursement, in equalproportion. The target disbursement rateis about 10 new loans per month. Extra ben-efits are offered if loan officers collect oldloans or go beyond the target. While man-agers emphasize that loan officers are devot-ed and key to the success of the program,Mona Mubarak, deputy manager of themicrofinance unit, notes that the “incentive

system is the basis for the microfinance pro-gram.” Management indicated that incen-tives and staff costs represent the unit’s mainoperating costs. To expand microfinance inthe NBD’s remaining 33 branches, as isplanned, most of the funds will need to beallocated to start-up and operational costs,including hiring new staff and providingincentives.


Loan officersdescribed the

microcredit program as beingvery successful inreaching clients ininaccessible areas

Branch Sawah, in greater Cairo, is one of thelargest branches in the NBD’s microcredit pro-gram. Since 1993 its loan officers have dis-bursed LE 51 million across 15,000 loans.Current outstanding loans are LE 4 million.Clients usually have no collateral, and 10 per-cent of clients are illiterate. Loans range fromLE 300 to LE 10,000. The branch employs 20staff members: 1 manager, 2 deputies, 10 loanextension officers, 4 computer and control offi-cers, 1 legal and follow-up officer, and 2 officesupport staff, including a driver. All the loanofficers are men. There used to be a femaleloan officer who stayed on the job for two yearsand who disbursed nearly LE 2.6 million in 950loans. But because some clients have troubleaccepting female loan officers, bank manage-ment has preferred to hire male loan officers.The work is difficult: loan officers are droppedoff in their areas of operation and often haveto spend all day walking while visiting 30–40clients. The officers interviewed for this reportare all between the ages of 25 and 35 and showtremendous dedication and commitment tothis type of work. • Amr was a recent graduate when he read

about the NBD’s microcredit program in anewspaper. He finds the work in the mobilemicrofinance unit to be very different fromthat in the regular branch where he used towork. Today he oversees 150 loans, with bor-rowers in income-generating activities suchas carpentry, sewing, shoemaking, and metalpainting. He visits 30–40 clients each week tocollect and disburse loans and research newapplications. Clients initially thought he wasa tax officer, and would often close theirshops and avoid him. Once the programbecame better known in the community,however, Amr established good relationshipswith his clients, who today hold the programin high regard. The rewards of his job—in

terms of financial incentives as well as the suc-cess of his clients and the change he feels hemakes in the community—keep Amr’senthusiasm for the job very high. He has noplans to return to regular branch work.

• Abdel Hamid joined the program in thesame way as Amr, and also has establishedexcellent relations with his clients. He visitsbusinesses, talks to the owners to promotethe microcredit program, and identifiespotential applicants. At first clients werereluctant to deal with him, as they did notexpect a bank to deliver services to them.Among his early experiences with clients, herecounted an encounter with an owner of abutcher shop who thought he was a thief andwas about to physically attack him. The pre-sentation of bank cards and some quick con-vincing saved him from the angry butcher.Today this client has taken several loans andenjoys a trusting relation with Abdel.

• Fatma handles loan documentation in thebranch, having spent time in the field as aloan officer in a few governorates. In oneday she sometimes handles more than 500loan receipts. Although field work is diffi-cult, she misses it—particularly the goodrelationships she had with her clients, whowere mainly women. She found it rewardingto see her clients develop their businessfrom a one-person operation at home to asmall workshop with a few additionalfemale employees, be it in sewing, cosmet-ics production, or grocery stores. All the branch’s loan officers described the

microcredit program as being very successful inreaching clients in inaccessible areas. Theybelieve that their work has made a difference inmoving many clients from total poverty to someeconomic security. Finally, they indicate that thedemand is huge and that they could disbursemany more loans if there were more staff.

Box 1. Branch Sawah—Reaching the poor quickly and effectively

According to NBD management, oper-ating expenses for the microcredit programfor the first seven months of 1998 totaled LE2.2 million ($650,000). The NBD, however,includes in this figure the interest paid onclients’ savings accounts. Thus operatingexpenses should be adjusted downwardslightly, to about LE 2 million ($588,000).What this means is that for every LE 100 gen-erated by this lending operation, the NBDmust spend LE 28.5 to cover operating costs.This is comparable to other microlendingoperations in Egypt.

Loan loss provisions

In 1996 the NBD adopted a target repay-ment rate to indirectly monitor the qualityof its loan portfolios, and loan loss provisionswere determined each year based on man-agers’ assessment of overall credit risk.7

Analyses of each branch’s portfolio quality,combined with a prudent loan loss reservespolicy based on the portfolio at risk,allowed the NBD to allocate a cost of loanloss reserves for each branch.

The NBD now uses two repayment ratesto monitor portfolio quality. In June 1998the figure for outstanding loans was 95 per-cent; the figure for disbursed loans was 99.2percent. Loan loss reserves are determinedquarterly by bank management. The degreeof risk is determined by analyzing the out-standing balance of each overdue loan, lessthe savings balance of that client and theamount held as a penalty fee, plus theamount generated by the insurance fee. Theremainder is considered at risk and is theamount used to determine loan lossreserves.8

The microfinance industry encouragesthe use of specific formulas to determinerequired loan loss provisions. For example,a portfolio at risk for 1–30 days could havea loan loss provision of 0 percent; for 31–60days, 25 percent; for 61–90 days, 50 percent;and for more than 90 days, 100 percent.Appropriate loan loss reserves are general-ly determined through discussions and

analyses carried out by the bank and its reg-ulator. Many factors can influence the“ideal” level of reserves.

Loan loss provision expenses in theNBD, expressed as a percentage of total rev-enue, were 9.3 percent in 1996 and 8.6 per-cent in 1997. No data are available on theappropriateness of this level of reserves. Butgiven that many microfinance programsgenerate a reserves expense closer to 5 per-cent, it might be possible to assess the over-all profitability of the NBD’s microlendingoperation by applying a conservativeassumption for this expense. Moreover, thebank has indicated that the microcreditportfolio is of a higher quality than the restof the bank’s portfolio. Thus this reportassumes that 10 percent of the revenue gen-erated by the microcredit program isapplied to a loan loss reserve. The justifi-cation for this high percentage, relative toother successful microfinance programs inEgypt, is the indirect nature in which repay-ment rates measure portfolio quality: therisk to the NBD could be higher than indi-cated. Since available data do not allow fora precise determination of risk, a higherthan normal expense will be applied to thisline item.

Overhead

The data for operating expenses providedby the NBD may not have included over-head expenses such as the cost of officespace and its depreciation. As noted, thebank manages the finances of its micro-credit program in a discreet manner anddoes not distribute information for eachbranch barring explicit authorization fromthe bank’s chairman. Thus the results belowon the overall profitability of the micro-credit program, above and beyond thecaveats already mentioned, may be inflated.A conservative estimate of the cost of over-head would be 10–12 percent. Even in thiscase, however, it appears that the resultingprofit margin of the microcredit operationcould absorb any further adjustments in


The microcreditportfolio is of ahigher quality thanthe rest of thebank’s portfolio

total expenses and continue to appeal to thebank’s board of directors.

Profitability

As noted, the sustainability of the NBD’smicrocredit operations can be assessedthrough an analysis of its profit margin. Table7 compares the income statement of themicrocredit program, adjusted as describedabove, with that of the entire bank.

This comparison brings to light signifi-cant differences:• The cost of funds is much higher for the

NBD than for the microcredit program.This is a direct result of interest rate pol-icy: the yield on microloans is substan-tially higher than on the bank’s corporateloans. Since the cost of funds remainsconstant in monetary terms, the portionof revenue that must be used to cover thiscost is lower for microlending. This gen-erates a higher financial margin withwhich to cover operating expenses.

• As noted, 14 percent of the NBD’s staffworks in the microlending operation, yetthis program accounts for just 1.3 percentof the bank’s loan portfolio. This disparityis reflected in the microcredit program’shigher operating expenses.

• Loan loss provisions are assumed to behigher for the microcredit program,although for most high-quality microlend-ing operations the actual figure is often

lower. As indicated, the assumption in thetable is conservative.

• The pretax profit of the microlendingprogram is at least twice that of thebank’s. Profits could be even higher withincreased efficiency. A large number ofstaff do not operate directly in lending(of 390 staff, 160 work in lending oper-ations), resulting in a very high over-head. Before the new management assumed

responsibility for the microcredit program,the profit margin was stable, at around 3 per-cent. After this new team made adjustments,the profit margin surged to 14.7–16.7 percentin June 1998 (figure 3). These impressiveresults affirm the NBD chairman’s decisionto expand the bank’s microlending operationthroughout its network of 66 branches.

Leadership

Senior management has been crucial to thesuccess of the NBD’s microfinance program.Their vision, drive, and awareness that com-mercial banks can help alleviate povertyserved as a catalyst for the initiation of theprogram. Senior managers also recognizedan intriguing business opportunity inresponding to potentially significant marketdemand for the bank’s services. Similar com-ments can be made for branch managers,who are usually recruited from the bank’scareer echelon. Branch managers andtheir deputies are intimately involved in


The pretax profitof the microlendingprogram is at least

twice that of thebank’s

Table 7. Profitability of the National Bankfor Development and its microcredit program, 1997(percentage of total revenue)

Entire Small and Micro-Indicator bank enterprise Department

Income 100.0 100.0Cost of funds 66.6 34.8Operating expenses 17.5 28.5Loan loss provisions 8.6 10.0Overhead (estimated) — 10.0–12.0Pretax profit 7.3 14.7–16.7

Source: Authors’ calculations based on NBD data.

Figure 3. Profit margins in the NBD’s microlending program, 1995–98

Percent

1998199719961995-30

-15

0

15

30

making decisions on credit at differentstages of loan application and client review.Managers often get personally involved inclient cases—particularly when it comes topotential risks of default.

Bank managers appear to be true believ-ers in microfinance, often cited as the key fac-tor for getting commercial banks involved inmicrolending. For example, the new generalmanager of the NBD’s microfinance unit, Mr.Bassiouni, was transferred to his current posi-tion from a previously held post of manag-ing “ordinary” and Islamic bank branches.He was initially bewildered by the large num-ber of staff in the unit, as well as by its admin-istrative costs. But he was quickly convincedof the business’s profitability and impressedby the rate of repayment (an average of 99.2percent, the highest of all NBD lending oper-ations). Today Mr. Bassiouni is the drivingforce behind the NBD’s plans to expandmicrolending in the remaining 33 branch-es using the bank’s own loan funds.Management in general now believes thatmicrolending should be carried out bybanks. Banks have the know-how, qualifica-tions, and methodology to conduct this typeof lending. In addition, commercial bankshave the branch networks needed to reachlow-income populations in both urban andrural areas. These banks’ desire to diversifytheir banking services and offer microlend-ing can be corroborated by the huge marketdemand by the entrepreneurial poor. Themost frequently cited obstacle, however, hasbeen the high start-up cost of hiring addi-tional staff and providing incentives, as wellas limited understanding of the microfinancebusiness. The profitability of microfinance,however, warrants that such programs con-tinue beyond initial donor support.

Career development and training

NBD management places emphasis onincreasing the efficiency and productivity ofhuman resources within the bank and hasprovided training at different levels through-out the bank. Staff have had the opportunity

to attend seminars, conferences, and train-ing courses by specialized institutions insideand outside Egypt. These courses aredesigned to enable staff members to enhancetheir skills, keep them up to date with devel-opments in the industry, and achieve thebank’s goal of offering clients the best bank-ing services (NBD Annual Report 1996).

Loan officers in the microcredit programgo through several months of training. Thisconsists of initial placement for two monthsat a rural branch in any of the governorates,coupled with theoretical training on thebasic tenets of microfinance. Loan officersare taught how to select and follow up onmicroenterprise clients, as well as how toconduct client research and analysis, issueloans, and deal with clients.

Moving beyond the daily operationaltraining needs of its staff, the NBD plans tobuild a major training center to providecourses in microfinance and other subjectstailored to the needs of clients. The centerwill be open to other Egyptian microfinanceinstitutions and to institutions from otherdeveloping countries. The center is expect-ed to offer high-level business and accom-modation services and will be a focal pointfor exchanging international experience,with instructors from Egyptian institutions aswell as foreign experts and practitioners. Thegoal is to achieve a fully self-sustainable insti-tute within 5 to 10 years. Funds are still lack-ing to complete this institution, however.More analysis of this initiative is needed tojudge whether it is justified by the actualdemand for such services, the center’s mis-sion and goals, and the substance of training.

Notes

1. USAID’s current policy is to fund only a minorpart of a microfinance program’s loan capital, andit requires banks to use their own deposit base.

2. An interesting development, as shown in theannex, is that the average loan sizes in the new,NBD-funded branches are considerably higherthan in the branches that were, or continue tobe, donor supported. This trend will be worth


The NBD plans tobuild a major training center toprovide courses inmicrofinance andother subjects

watching as the NBD continues to extend itsoperations into the small enterprise andmicroenterprise sector.

3. These statistics, however, exclude self-fund-ed branches, for which data were not providedby the NBD.

4. In 1996 the financial assessment of the NBD’smicrolending program obtained information oneach of 13 bank branches. At present, NBD per-sonnel are not authorized to share these data withnonbank personnel. As such, the data in thisreport refer to the entire program. For com-parative purposes, the bank provided consoli-dated information for the 13 branches that wereanalyzed in 1996.

5. “Flat” interest rates are applied to the amountdisbursed rather than to the outstanding (anddeclining) loan balance. For example, flat inter-est on a 12-month loan of LE 1,000 would be LE160 (1,000 * 16 percent = 160). The total debtwould be LE 1,160, divided into 12 monthly pay-ments of 96.67.

6. Although the life insurance fee is put in acontingency account upon receipt, in the longrun it can be considered income from a financialservice. As for the penalty fee and prepayment,since most borrowers are repeat clients, these feescan be rolled over and so can be consideredincome as well.

7. The repayment rate compares installmentsthat should have been paid in a particular timeperiod with installments that were actually paid.The time periods may be cumulative from a pro-gram’s beginning or can be yearly, quarterly, ormonthly; techniques vary. The portfolio at risk(the outstanding balance of loans in arrears divid-ed by the outstanding balance of all loans) mon-itors portfolio quality more precisely.

8. For example, in the United States theInternal Revenue Service determines the policyfor loan loss provisions in banks. This is becauseof the effect these provisions can have on netprofit, and hence the level of taxes to be paid tothe government.


23

Making the move to microfinance

The NBD is the only private commer-cial bank in Egypt that manages itsown explicit microlending operation.

Although other banks in Egypt may providemicrolending, none has a dedicated depart-ment such as that located in the NBD.

There is tremendous demand for finan-cial services, particularly loans, amongpoor households in Egypt. Yet even thoughthe outstanding loan portfolio of Egyptianmicrofinance providers is by far the largestof all the countries in the region, only 5 per-cent of the potential demand for suchresources is being met.

Banks appear to be a natural conduit formicrolending. They have an existing infra-structure (their branch network) fromwhich to offer financial services, and theymanage the country’s savings. Internal sav-ings are a sustainable alternative to the funds

provided by international donors formicroenterprise development. Many banks,however, perceive microlending to beextremely costly and risky.

While it is true that microlending is cost-lier than corporate lending, the NBD hasshown that microlending can be highly prof-itable. Microcredit borrowers are willing topay higher costs—in terms of both interestrates and fees—for convenient and timelyservices. Moreover, a properly managedmicroloan portfolio may be of higher qual-ity than traditional corporate loans inEgypt. Finally, microlending involves thedevelopment of long-term relationships.When quality services are offered, clientsoften return for additional, larger loans.Since the cost of managing repeat loansdecreases, microcredit may become moreprofitable over time.

Banks appear to bea natural conduitfor microlending,which can be highlyprofitable

24

Annex Loans by the National Bank forDevelopment’s Small and MicroenterpriseProgram

Table A.1 Number and value of donor-funded loans

Share of number Value of loans Share of value Average Number of of loans disbursed disbursed (millions of loans disbursed loan size

Branch loans disbursed to women (percent) of U.S. dollars) to women (percent) (U.S. dollars)

Greater CairoGiza 8,076 17 7.53 15 933Helwan 10,132 14 7.79 11 770Sawah 15,338 18 15.19 15 990Shobra El Khima 7,318 14 6.05 12 828M. El Gedidah comm. 8,734 16 6.29 13 720M. El Gedidah Islamic 7,183 15 6.31 13 878Garden City 8,746 13 8.10 10 927Zamalek 9,079 15 7.44 12 819Bab El Louk 8,768 14 8.75 13 1,016Azhur 7,030 6 6.32 4 899Kasr El Nil 9,148 8 8.74 6 956Borsa 7,786 12 7.84 9 1,007Opera 8,301 8 8.94 15 1,077

Sharkia Belbis 14,596 22 5.36 19 367Kafr Sakr 11,492 20 3.98 17 346

Dumiatta (RSSE)Dumiatta 10,160 6 4.27 6 420Faraskore 13,755 17 4.28 14 311Menia 8,584 28 2.94 26 343Qena 4,527 69 1.47 56 324Luxor 9,470 91 3.47 86 367

Note: As of June 30, 1998.

ANNEX LOANS BY THE NATIONAL BANK FOR DEVELOPMENT’S SMALL AND MICROENTERPRISE PROGRAM 25

Table A.2 Number and value of self-funded loans

Number of loans Value of loans disbursed Average loan sizeBranch disbursed (U.S. dollars) (U.S. dollars)

el-Zakazeek 122 308,473 2,528San El-Hagar 59 99,550 1,687Ismaelia 84 211,377 2,516Tanta 264 722,305 2,736Mahal El Hobra 2 4491 2,245Banha 17 48,203 2,835Biela 97 228,143 2,351Shbin El-Kom 29 65,419 2,255Abu El-Matamir 159 368,413 2,317El-Fayoum 97 240,119 2,475Assiut 64 170,808 2,668Sohag 276 664,970 2,409Aswan 52 126,047 2,423

Note: As of June 30, 1998.

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References

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Baydas, M., D. Graham, and L. Valenzuela, 1997.“Commercial Banks in Microfinance: NewActors in the Microfinance World.”Development Alternatives Incorporated,Microenterprise Best Practices Program,Bethesda, Md.

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