The banking sector in Egypt is among the oldest and largest in the region. The National Bank of Egypt (NBE) was the first bank to begin operation in the country in 1898; also in the year 1898, the stock exchange was established. In that time, central bank functions were partially performed by the National Bank of Egypt, which was the sole body licensed to issue Egyptian banknotes. The size of the banking sector has grown rapidly during the first half of the 20th century. In 1956, a total of 32 banks were operating in Egypt. Those banks included 26 commercial banks, four mortgage banks, one agricultural bank, and one industrial bank. All were foreign banks except the National Bank of Egypt and Bank Misr (Huband, 1999).
During the period 1957–1974, nationalization had a dramatic impact on Egypt's financial system. The closure of the Egyptian stock market and the confiscation of all foreign banks turned the financial system into a stagnant, non-competitive sector. Only fully owned Egyptian banks were permitted to operate. In February, 1960, the National Bank of Egypt was nationalized, and in 1961, the Central Bank of Egypt was established to perform its responsibilities as the unique entity responsible for setting banking system regulations (World Investment News, 1998). Starting in the mid-1970s, the Egyptian banking sector expanded markedly, along with the country's open door policy that aimed at an outward-looking growth, with an active role for the private sector to promote economic performance, which was coupled with a new banking law enacted in 1975 defining the nature and mode of operations for all banks. Today, Egypt has a total of 62 banks, with more than 2400 branches, as well as 28 representative offices of foreign banks and three unregistered banks, which do not report to the Central Bank of Egypt (CBE, 2001).
Capitalizing on its comparative advantages in the service sector, financial-sector growth potentials, and noticeable economic growth, Egypt is currently moving steadily towards becoming the biggest financial center in the region. Owing to the flourishing privatization program and the prospering domestic bond market, banks have encountered new investment fields, which helped them, diversify their portfolios and lower their financial risks. Retail banking was the most important among those new fields (Egypt SIS, 1999). Retail banking is that part of commercial banking concerned with the activities of individual customers, generally in large numbers. Retail banking is considered less risky compared to corporate banking, as it involves a more diversified loan portfolio across a mass market. Retail customers provide reliable low-cost sources of funds for asset management and good opportunities for retail securities placement and fund management. However, the retail business requires heavy investments to increase the number of branches, enlarge staff size, expand the ATM network, and establish various delivery channels (Grant, 1984).
Since the mid-1990s, the banking sector in Egypt has been changing fast, and after decades of focusing on generating corporate assets, most public and private banks are starting to recognize the potentials for retail business represented in the relatively underbranched banking sector, compared to the high population and the rising per capita income. Accordingly, most banks started to penetrate the retail market. Recently, the number of individual bank customers reached 9 million (Business Monthly, 2000), and a variety of retail products are currently offered by a large number of banks, including payroll accounts, car financing, mutual funds, credit cards, and personal loans. Moreover, banks are competing in expanding their branch networks and diversifying their delivery channels to include ATMs, call centers, mobile banking, and Internet banking. As part of the research, an environmental PEST analysis was conducted to study the political, economic, social, and technological factors affecting the banking sector, with a focus on retail business activities and the deterrents facing the development and growth of the banking sector.
The political system in Egypt played a significant role in the growth and expansion of local and international banks and played a major role in attracting banks and financial institutions worldwide to establish joint ventures or representative offices in Egypt. The banking sector has been entirely public since the late 1950's, when it was nationalized. However, in the mid-1970's, an open-door policy allowed the establishment of private banks. In 2002, there are a number of international players in the market, including Barclays, American Express, Citibank, HSBC, and recently, Standard Chartered Bank (CBE, 2000). Moreover, a number of laws and regulations were established to help the banking sector grow, especially focusing on the retail banking business, including an electronic law, which is expected to have a positive effect on the growth of the credit card market of different banks. Additionally, the expected approval of the new mortgage law represents another opportunity for banks to expand their retail activities in the area of housing loans (Business Today, 2001).
Since the mid 1980s, Egypt started to follow an economic reform program, which was designed to establish a stable and credible economy. Macroeconomic indicators look positive, with a growth rate at 6.5%, inflation rate at 2.8%, and budget deficit at 3.6% of gross domestic product (BSAC, 2001). Egypt's success on its macroeconomic agenda secured the stability necessary to establish investor confidence and stimulate the capital market (BSAC, 1999). The growth rates of banks' assets, deposits, and loans are direct reflections of the economic growth of the banking sector, yielding a CAGR of 12.6% during the period between 1995 and 1997 (CBE, 2000).
The Egyptian population of more than 68 million in December 2001, represents many attractions for local and foreign banks to expand their business. The current individual bank customers represent around 13% of the population. Among those customers, the number of credit and debit cardholders is less than 7%, which directly reflects the great potential for plastic money in Egypt (Business Monthly, 2000). According to age, bank customers can be divided into three segments:
Youth (20–30 years old) represent the most important target group, with their accounts and student loans. They easily adopt technology, but their loyalty to the bank they deal with is not guaranteed, requiring continuous innovative financial services to attract them and cost switching to keep them.
The second age group, 30–50 years old, represents good potential due to the large number of housewives within that segment who are willing to use different electronic delivery channels, like ATMs and phone banking.
The last segment, above 50 years of age, shows some reluctance to deal with banks in general, and to using technology-based services in particular, requiring special care and incentives, such as retirement packages and special senior accounts.
For a long time, the market in Egypt was dominated by cash society values, with people reluctant to go to the bank and open an account for purely cultural reasons, opting to keep their cash at home. However, recently, the private sector started to include their employees in various payroll plans offered by different banks. As a result, the number of individual bank customers increased, and a relatively high level of awareness was established among certain segments of the society, which started to recognize the benefits of retail banking. However, it is important to note that the society highly values human interaction, which affects the penetration of retail banking through electronic delivery channels, especially among the less-educated, who are not comfortable dealing with technology-related equipment. Moreover, among the other current problems is the fact that credit cards are scary for some people due to the high interest rates; very few people are using ATMs for deposits or are willing to use their credit cards over the Internet. It is important to note that the average illiteracy among the population is more than 39% (EFG-Hermes, 2001), and a large portion of the remaining 61% is considered under-educated. Consequently, ease of use, simplicity, and Arabic interfaces are key factors for the adoption of new services provided by banks. In general, consumers in Egypt are considered flexible and fast to adopt new habits, which is obvious in the penetration rates of mobile telephony, which was first introduced in 1997. There are now more than 3.5 million subscribers, even though telephony was introduced early in the last century and to date, there are only 7.1 million land lines (http://www.mcit.gov.eg). However, in order to capitalize on such an advantage, banks need to familiarize consumers with the services and products they offer through solid marketing communications strategies. Such services have to provide an attractive value proposition to the local market.
The rate of information and communication technology adoption in the banking sector was increasing steadily over the last decade as a result of the growth in retail banking activities, opening of competition within the sector, and noticeable government support of automation efforts. Offering retail banking services involves providing customers with electronic payment systems, such as plastic money debit and credit cards, as well as technology-based delivery channels for performing their daily transactions. Such channels, which are known as remote access systems or self-service banking, include ATMs, call centers, phone banking, Internet banking, and mobile banking. The use of plastic money has a number of benefits, including reducing the cost of printing money and the proliferation of money not fit for circulation. Moreover, the introduction of remote access electronic delivery channels relatively increases access to customers and significantly cuts the cost of transactions, as shown in Figure 3 (Beck et al., 1999).
Figure 3: Lower Transaction Costs Through Technology
Since the mid 1980s, Egypt has focused on building its information and communication technology infrastructure, which was reflected in the introduction of the liberalization program of Telecom Egypt in 1998, and the establishment of the Ministry of Communications and Information Technology (MCIT) in 1999. The tremendous improvements in telecommunications infrastructure cost, reliability, bandwidth, and reach achieved are providing a strong impetus to substantial technology investments in the banking sector in Egypt (Magued, 2001). However, despite the increasing technology investments made by banks, the sector is still considered in the early development stages in terms of banking technology infrastructure necessary for future large-scale card issuing, widely distributed ATM networks, efficient call centers, and automated clearing operations.
In the mid-1980s, banks started to install point-of-sale machines and encouraged members to accept payment by credit cards, correspondent to the growth in international and business travel. By the early 1990s, the first locally issued credit card found its way to the local market. Currently, 26 banks in Egypt issue debit and credit cards, but the number of cardholders is small, estimated at 600,000 locally issued cards, among which, more than 400,000 are credit cards, representing less than 7% of bank customers, which is estimated to be around nine million. However, the market for debit and credit cards has great potential and is expected to reach one million cardholders in 2002, according to the forecasts of Visa International (Business Today, 2001). One of the indicators for such potential is the success that Citibank Egypt realized in the issuance of 50,000 credit cards in less than two years. In addition to the traditional debit and credit cards, banks are competing to introduce a number of innovative card products. For example, in 2001, Citibank and Vodafone, Egypt's leading mobile operator, launched a co-branded credit card to add a new product to the variety of credit cards issued in the Egyptian market (Business Today, 2001). Moreover, the use of ATMs, as a remote access channel to banks, has been in place since 1994; however, the rate of growth and adoption is fairly low, and according to the Commercial International Bank, Egypt's leading retail bank, the average number of ATM transactions performed monthly by a bank customer is currently four times the number recorded in 1998. The installed ATM population is currently low, but the rate of installation growth is relatively high. In August, 2001, the total committed ATM population in Egypt was 721, expected to double in 2002, which is still a relatively small number in comparison to the United States, with its 197,500 machines. Moreover, several banks have installed interactive voice response (IVR) systems and are considering the installation of call centers to follow the Citibank Egypt initiative introducing the concept of call centers in Egypt in 1999, known as Citiphone (Kamel & Assem, 2002).
With respect to Internet banking, Internet access in Egypt dates to 1993, mainly through governmental and educational organizations. Commercial Internet access was available since 1994. However, it was in January, 1996, that the government made an official address authorizing the private sector to step into the provision of Internet services. By April, 2002, Egypt's 51 private-sector Internet service providers delivered service to an estimated one million subscribers (http://www.mcit.gov.eg). The government is currently in the process of increasing Egypt's transmission capacity on the Internet in order to meet the increasing number of Internet users, who are expected to reach two million by the end of 2002. Moreover, the government, starting 14 January 2002, underwent a major step to diffuse the use of the Internet across its 26 different provinces by providing Internet connectivity for free (http://www.mcit.gov.eg). Internet banking, also known as online banking, is still not fully introduced in Egypt, mainly due to the relatively low number of Internet users. However, since late 2001, Citibank offers the first of such services as a prototype, allowing customers to check their account balances, perform internal transfers, and pay their monthly credit card bills through the Internet. Most of the other commercial banks have short-term plans to launch Internet banking as well.
With respect to mobile telephony, the GSM service started in 1996 by the government was soon after privatized, and competition was introduced. However, despite the rapidly increasing number of mobile subscribers, mobile banking is currently only offered by the National Societe Genarale Bank and is still not very popular among bank customers. Therefore, more efforts need to be made in that area in terms of increasing the simplicity of the user interface and conducting customer education and awareness programs.
To conclude, retail banking is strongly affected by political, economic, social, and technological factors. The current environment of the retail-banking sector includes many opportunities, as well as a number of risks. Although the potentials are high, the challenges are much higher. Therefore, in order to succeed in the market and build a respectable customer loyalty, banks operating in Egypt need to work on increasing customer awareness, and to carefully study and understand customers' social and economic needs. Such understanding can be achieved through different marketing communications tools, which can provide banks with customer feedback about the products they offer.