The government's newly introduced regulations to e-wallets could improve the lives of 85% of the private sector, 18 million establishments, 40,000 factories, raising more than 14 million people out of poverty.
On December 17th, Mohamed Bouazizi was harassed multiple times by police officers for being a street vendor, not having a permit or the money to bribe the police like most legal establishments do in the Middle East. After having his produce seized, being slapped, and spit on by security forces, he stood outside the governor’s office, doused himself with gasoline, and shouted, “How do you expect me to make a living?” Well, a revolutionary innovative technology being adopted in Egypt may have prevented this. If Bouazizi had a mobile e-wallet and was living in Egypt now, he would have some proof he was permitted to be a street vendor, he could have paid the bribe by dialling a service number, he could have taken a loan from a bank, contacted the government through his mobile, he could have lived in any city and transferred money to his family instantly. In fact, with a mobile phone, proper regulation, and the revolutionary e-wallet Bouazizi might not have shouted, “how do you expect me to make a living?”
The informal economy is a term that’s used to describe the thousands of businesses, often in reference to self-employed individuals or companies with less than 10 employees, who operate without any formal connection to the government or the economy. The Arab Spring has awoken the government to not only the potential of the informal economy to propel Egypt into a modern developed nation, but also the threat of disaster if this massive segment of the population is continuously neglected and unsupported. One of the means by which Egypt has been supporting the informal sector is financial inclusion and technological integration of these informal businesses. If you’ve lost hope in the accomplishments of the Arab Spring, then perhaps this will give you some hope for positive change in the future.
Before the uprising, 85 percent of small medium-sized enterprises (SME), along with 14 million jobs, were considered ‘informal’. This was due to the mass privatisations of public sector employment and the ability of multi-national corporations to outcompete Egyptian companies in free trade. Large scale corporations and businesses still require supplemental activities that they cannot - or don’t care to - provide; vendors, electricians, repairmen, assemblers, textile, or domestic workers, and home-based employment which are the most common forms of informal labour. The breakdown in state authority after the revolution simply made such economic channels more attractive for everyone, from sellers to buyers. In fact, some Egyptians, particularly the youth, saw the spike in informal activity as a form of revolutionary entrepreneurship.
The government has recognised, not only the developmental and growth potential of incorporating the informal sector, but the political need to properly manage it if any of them want to avoid another uprising. An important factor behind this shift has been the unrelenting pressure to generate more and better jobs; the region's labour supply is rapidly expanding while the new entrants in the labour market have higher education levels than those of previous generations. This certainly represents a major opportunity for development, but also a potential liability for social and political stability if that opportunity does not materialise.
What’s the potential? Well, Nigeria used to be the third largest economy in Africa, however, they were propelled to the top-ranking economy of Africa through one thing; the inclusion of a large portion of the informal economy. Nigeria’s GDP jumped from $169 billion in 2009 to $369 billion in 2010 to $521 billion by 2013 due to the informal economy’s inclusion. Also, Brazil saw a 50 percent decline in poverty after its informal sector was included into the economy. According to the World Bank, Egypt has more than 40 million people living in poverty, so 20 million people not languishing in misery would be a great thing for everyone.
According to the Egyptian Centre for Economic Studies (ECES), the informal sector in Egypt is estimated to be 65-70 percent the size of the formal economy and worth 68 percent of Egypt's current GDP, accounting for EGP1.2-1.7tn, 18 million establishments, 40,000 factories, and results in an estimated EGP300bn in lost tax revenue for the government. This inclusion would comfortably propel Egypt to become Africa's biggest economy and one of the top 25 economies of the world.
So, how is the government going about doing this? Previously, under Nasser, informal small and medium-sized businesses were forced into inclusion. However, the Sisi regime has gone about things in a different way; financial inclusion and regulation, as well as technological integration. On the tech integration front, the Egyptian government is one of three governments in the Middle East to have a number of national research and development programmes to integrate new technology into the SME sector to promote development, but financial development is a little trickier.According to a report by the World Bank on household surveys, 14 percent of adults in Egypt own a formal financial account at a bank, 6 percent had taken loans, less than 2 percent own a credit card, only 2.2 percent had a mortgage, and 94 percent of all transactions are in cash. So, how do you financially include people if they don’t even have a bank account?
Well, according to the Ministry of Communications and Information Technology, nearly 97-99 percent of Egyptians have a mobile phone, 23 million smartphone users with a 10 percent growth rate, 33 percent of the population has access to the internet with an average growth rate of 8.1 percent.
So, one of the main methods of financial inclusion has been the e-wallet. An e-wallet is a virtual wallet that allows people to store their money and use it for transactions and making purchases. It connects to a mobile operator like Vodafone and is accessible from your phone, smart or otherwise. It does away with the need to input personal information with a bank to make online and real life purchases electronically. In the same way as borrowing credit or topping off credit, the Egyptian e-wallet allows you to pay your bills, send money, deposit or withdraw cash from ATMs, transfer money to any other e-wallet, mobile network or device in Egypt, access several government services, as well as receive domestic and international salaries all without a physical card. Egypt could see a massive expansion in the banked population through the benefits of their phone bank account.
So why is financial inclusion so important and what is the government doing about it? According to World Bank Enterprise Survey in 2010, the Arab world had the smallest share of firms (25 percent) with access to money from financial institutions. Access to finance is one of the greatest challenges facing informal businesses across the globe, and particularly for MENA where nearly 63 percent of the SMEs do not have access to finance; the smaller the business is, the less access to finance. The total financing gap for SMEs in MENA is estimated at $210 to $240 billion.
Now, the Central Bank of Egypt’s initiatives are encouraging banks to fund SMEs. This initiative also requires that banks reform the laws and regulations for SMEs, and allocate 20 percent of their loan portfolio to these projects. So, there’s money, but how do they get it?
The wallet is the ultimate way to reach the unbanked population, provide an incentive to be included in the economy, and get some of the financing coming from banks. We talked to Paymob COO Alain El Hajj to discuss the government’s efforts to support SMEs and formalise the informal economy. Mr. Hajj explains that the Central Bank of Egypt has provided banks and telecom companies with licenses to use the wallets and according to him, they “have been doing a really great job.” He explains that the mobile wallet is quite regulated in the country, that many limits and sets of rules are in force to avoid fraud. “This is something that we support to avoid mistakes that other countries fell into,” El Hajj explains.
When India attempted to include the informal economy by forcefully removing physical currency without providing an alternative, it not only led to mass protests and strikes, it also lead to mass suicides. Kenya which has a very developed mobile wallet system - more than 70 percent of adult males use a mobile wallet to pay bills and transfer money, is often talked about in reference to the potential of mobile banking. It is also a cautionary tale. Their central bank was unable to see the numbers attached to these transfers, and the lack of regulation led to numerous incidents of fraud. Kenya is now making things better through exactly what the Central Bank of Egypt is doing.
Egypt’s Central Bank took a different route, when they made it legal, it was heavily tracked. “The Central Bank said that if you want to do these mobile wallets, you’re going to be regulated, and to be regulated, we’re going to attach you to a bank account and have all the financial records inside the banking system. They said that this regulation will slightly slow down the growth, the penetration, and the potential of what it can achieve but it’s the right way to do it and protect the ecosystem and the country from threats,” El Hajj says. A long way from the typical international investors’ calls for deregulation.
However, giving uneducated people access to basic financial services can carry a lot of risk, just ask college kids in the US about their credit cards. Poor understanding of products, rights and duties, insufficient ability to manage their budget can lead anyone to over-indebtedness, excessive bank charges, or taking unknown risks. “Some people are afraid of banks, they don’t understand the concept and they need other alternatives. This is what the mobile networks have offered,” Alain explains.
This allows network providers to quickly give access to millions of people with a few basic banking abilities. The mobile wallet allows the underprivileged to become consumers of banking products, so financial education is an essential part of financial inclusion, and technological integration is imperative to closing the gap between SMEs and multinational corporations. It’s also why, when asked what is the number one most needed infrastructure development would like to see from the government, Hajj's immediate answer was education.
The wallet could tackle a problem that no one thought of and that was transferring and moving money. While the Central Bank does not yet allow cross-border movement of money, it does allow for cross-governorate movement of money, a powerful addition to those working in major cities while their families are in smaller cities, towns, or villages. Hajj explains that before, people would have to pay the bus driver to deliver a package of money to someone at their end destination. They told the bus driver to look for a person with so and so national ID to deliver money to their family members. The potential for exploitation and theft is obvious. Alternatively, people could mail the money through the postal service. If you’ve ever had to mail anything, much less money, you’ll know that the potential for exploitation and theft is also very high. Not to mention the fact that even if the money did arrive, it would take weeks to get there.
Egyptian officials have often blamed the poor for its lack of development; the burden of subsidies, social spending, and traffic, due to overpopulation. With 26.3 percent youth unemployment and the threat of brain drain with qualified individuals travelling abroad, the need for productive employment that ensures upward mobility is critically needed for Egyptians and the Egyptian government. People need to have the chance to increase their living standard and build a better life for themselves and their families. Most of all, they need to feel included in the state, the economy, and society. By encouraging inclusion, the government will not only ensure real economic development is achieved, but also ensure that they're not ousted in another uprising. The development of the informal sector, the promotion of innovation, and support of SMEs represents real potential for Egypt’s development given that the only resource the country has in abundance is Egyptians.
Photo by @MO4Network's #MO4Productions
Photography: Seif Mansour
Art Direction: Karim Alwi