Fintech in Egypt

As the global economy recovers from COVID-19, financial inclusion became the main focus worldwide. For vulnerable segments of the population, access to and use of basic financial services is critical for poverty reduction, increased resilience, and improved economic growth.

Fintech innovations have been contributing to the reduction of costs associated with providing services, facilitating more reach, and reducing the need for face-to-face interactions, which were essential elements for ensuring active economy during the pandemic. According to Earnst and Young 2017 Global Fintech Adoption Index, one-third of consumers utilize at least two or more fintech services.

When Fintech emerged in Egypt, it was challenging yet promising. With Egypt’s Vision 2030, the government is seeking to become the first destination for digital investments in the MENA region, with the fintech industry complementing Egypt’s overall aim to secure financial inclusion. A couple of years ago, the Egyptian President launched the Digital Transformation Initiative for the Egyptian Government and its institutions, aimed at creating a sustainable, competitive, and strong digital economy.

The government’s focus on the transition to a cashless society has been accelerated by the pandemic, which significantly altered the Egyptian population’s perceptions, and use, of digital payments. This will enhance economic growth by creating a smart digital environment and ensuring market competitiveness, allowing international institutions and companies to compete to localize technology in Egypt, while supporting business and e-commerce platforms, e-payment gateways and supply chains.

In accordance with the Central Bank of Egypt report published in 2022, the volume of investments in fintech companies grew by 300 percent during 2021, compared to the previous year. The amount of investment reached $159 million in 32 deals in 2021, indicating the development and expansion of emerging fintech companies operating in this field. Fintech start-ups have seen a steady increase, from two start-ups in 2014 and three fintech investments in 2017, to 112 companies by the end of 2021, in more than 14 innovative sub-sectors such as payments, remittances, and business markets, lending and alternative financing.

What is Financial Technology?

Fintech is a term used to describe any new tech that seeks to improve and automate the delivery and use of financial services. At its core, fintech is utilized to help companies, business owners and consumers to better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones.

Broadly, its scope includes several services such as cryptocurrency, digital cash, cybersecurity, smart contracts and blockchain technology. Fintech now includes different sectors and industries such as education, retail banking, fundraising, money transfers, depositing a cheque using smartphones, bypassing a bank branch to apply for credit, raising money for a business start-up, managing investments, generally without human assistance. In other words, fintech applies to any innovation by virtue of which people transact, from the invention of digital money to double entry bookkeeping. It also consists of open banking, insurtech, regtech, robo-advisors, platforms for nano-finance services, and platforms for consumer finance services.

Egypt’s First Fintech Regulator; the Central Bank of Egypt “CBE”

Financial services are among the most heavily regulated sectors in the Egypt. Any entity operating in the field of financing individuals or juristic persons must be exclusively regulated, governed and supervised by either the CBE or the Financial Regulatory Authority “FRA”. The CBE is authorized to control, supervise and regulate companies carrying out any banking activity.

To achieve the 2030 goals, the CBE issued a number of legislations and took several measures to unleash a surge in new fintech investments and changed the way the country’s largely unbanked citizens do business. Such legislations, regulations, and measures include but are not limited to the following:

• Issuance of the CBE and Banking Sector Law No. 194/2020; which is considered the first legislation in Egypt to directly address and regulate fintech activities. It devoted an entire chapter regulating digital transformation in the financial and banking sectors. The law mandates the CBE to take all necessary measures to promote the development of the use of modern technologies in any of its fields. Articles 184 – 206 refer to both Fintech solutions and associated technologies, the Law drew a fine line of what the CBE will be willing to accept for payment solutions but only after passing through a trial phase.
• Issuance of Less – Cash Payments Law; which addresses governmental entities digitization. It mainly encourages the use of electronic payment instruments and channels to make it more convenient for citizens to pay for governmental services. The Law also aims at increasing government proceeds and the country resources, thus bolstering the national economy.
• Issuance of Instant Payment Network (IPN) Regulations.
• Issuance of Digital Financial Services Regulations; Customer Due Diligence Procedures (CDD) for Mobile Payments.
• Issuance of Mobile Payments Regulations- Digital Lending based on Behavioural Scoring and Digital Saving on Mobile Money Wallets.
• Issuance of QR Code Unified Standards.
• Issuance of Regulations for Internet Banking Services.
• Issuance of Agent banking discussion paper.
• Issuance of the CBE’s Fintech & Innovation Strategy.
• Releasing Fintech & Innovation Hub.
• Launching FinTech Egypt portal.
• Membership of regional and international FinTech related entities.
• Cooperation between national and international regulators.

The Non-Banking Financial Services Regulator “FRA”:

Although there was no regulated framework for non-banking fintech activities, non-banking financial services companies (“NBFS”) used to operate without obtaining licenses or approvals from any regulator. However, the FRA expressed in several occasions its willingness to admit and support modern financial technology. The first Fintech model accepted by the FRA was a brokerage firm, which has been recently licensed by the FRA to become the first fully functioned digital platform providing stock and & Equities trading platform.

On February 8, 2022, Law no. 5 of 2022 Regulating and Developing the Use of Financial Technology in Non-Banking Financial Activities (the “Fintech Law”) was issued granting the FRA the power to regulate the use of financial technology in the NBFS. The main aim of the Law is to introduce the long awaited rules governing the non-banking financial sector and players with the government’s aim to apply financial inclusion strategies, and foster the switch to a cashless society.

The Fintech Law adopted the financial inclusion as its primary purpose. It defined financial technology as “any mechanism that utilizes modern and innovative technology in the non-banking financial sector to support and facilitate financial services, financing and insurance activities using applications, software, digital platforms, artificial intelligence, or electronic records”.

According to said law, The FRA shall issue the executive decisions of the Fintech Law within a maximum period of six months. In less than two months from the issuance of the Law, the FRA issued the first executive decision pertaining to the requirements, conditions and procedures of incorporating and licensing non-banking financial institutions providing their services through a financial technology. Additionally, the FRA is currenlty preparing for a bunch of decisions executing and complementing the Law.  Entities that fall under the scope of the Law shall have a grace period of six months from the date of issuance of the said executive decisions to comply and reconcile. However, such period may be extended to a maximum period of two years by virtue of FRA board’s decision.

The Fintech Law empowers the regulator to set out further requirements pertaining to businesses’ governance, including ownership and board of directors’ structure, the price of each license (although the law sets an EGP 50k ceiling), and the experience that will be required to register with the FRA as a service provider. Providers will also need to comply with anti-money-laundering regulations and procedures.

Entities subject to Fintech Law are: (1) existing non-banking financial entities licensed by the FRA that wish to render their services using financial technology; (2) entities under incorporation or entities that will be incorporated after the promulgation of the Law for the purpose of rendering non-banking financial services using financial technology; and (3) Entities engaged in financial technology outsourcing services (such entities shall be registered with the FRA to be established registrar). It is to be noted that FinTechs operating in Egypt and/or FinTechs operating outside Egypt but serving customers/clients residing in Egypt are subject to the provisions of the Fintech law.

Empowering Start-ups; CBE and FRA Start-Ups initiative “Regulatory Sandbox”

The CBE has created a controlled testing environment where start-ups are able to live test innovative business models and delivery mechanisms with relaxed regulatory requirements while managing the risks associated with disruptive technologies.

Similarly, the FRA will have its own sandbox for non-banking fintech activities enabling start-ups to test their FinTech products with real consumers under the supervision of FRA. Under the new Fintech Law, the FRA may issue a temporary fintech start-up license to newly established start-ups operating in the field of non-banking financial activities using financial technology. The aforementioned fintech start-up license shall be valid for a maximum period of two years. Furthermore, the capital of fintech start-ups applying for said license shall not be less than EGP 250,000. In order for start-ups to obtain such license, they must submit a standard request form, along with proof of sufficient issued capital for the product/service provided, and of having on-boarded an auditor. NBFS players seeking a fintech license will also need to have the necessary tech, database and data protection infrastructure, as per FRA requirements.

Conclusion and Next Steps

Fintech apps have been widely accepted as a way to integrate the largest number of citizens, including those from traditionally underserved segments, into the banking systems. This allows for increased customers reach whilst also driving financial inclusion and bridging the gap between the informal and formal financial sectors.

Egypt’s journey to a cashless society gives fintechs the opportunity to tackle supply and demand barriers hindering financial inclusion, from regulations to improving financial accessibility through technology. Traditional on boarding practices of being present in-person and using hard documentation is being replaced by secure and digital solutions, screening against AML, document proofing, and analysing risk credentials, which facilitate the remote on boarding process thus enhancing customer experience, lowering costs and becoming time efficient.

While achieving the financial inclusion goal, the Egyptian government has always kept an eye on the protection of personal data in all the above-mentioned laws, alongside with issuing a separate Data Protection Law No. 151/2020 to further emphasize on protecting market participants and their data.

It is of grave importance to note that the CBE, in cooperation with FRA, is currently preparing to issue a new law to regulate alternative finance activities including Peer-to-Peer lending, crowdfunding, rotating savings and credit association “ROSCA” and other newly developed digital financing activities. This will lead to the availability of different new financing services within the Egyptian market to meet the needs of targeted customers as well as legalizing all grey-zoned and non-regulated companies.