Egypt, March, 15 2007 - A new credit bureau will allow more consumers access to a range of financial services, with far-reaching implications for the Egyptian economy

The un-banked portion of our own population find loan requests blocked by bank requirements calling for salary levels, bank accounts and sometimes even collateral that they do not have. To get the money they need, many Egyptians turn to the gaam’eya, the home-grown borrowing collective that is similar to the susu in the West Indies, tanda in Mexico and kaes in Korea.

In a gaam’eya, a small group of people agree to each contribute a set amount each month, with a different person collecting the total every four weeks. There’s no official paper work, no collateral requirement and no minimum income needed, just a handshake agreement among the participants. It’s a common practice across the social spectrum, from children to adults, street sweepers to salesmen. Whether it’s a religious practice, as some argue, or simply a folk custom, the gaam’eya serves as an alternative to the formal banking system of lending, of which many consumers have negative perceptions.

“Some people don’t trust the [lending institutions] because you can’t [withdraw] your money as soon as you [deposit it] in the bank,” says Samah Morsi, who runs a gaam’eya in Cairo. “You can’t take it the next day. You have to wait one month or half a month or something like this. They will say to you, ‘It was invested already, you won’t get it back again. We can’t give it back to you.’

“And they take a lot of interest [on loans]. If you [borrow] LE 10,000 you will pay back about LE 15,000. That’s LE 5,000 [] this is a big difference,” she exclaims. “But if you [join] a gaam’eya and you pay LE 10,000, you will take LE 10,000.”

With their emphasis in the last two years on retail services, banks are clearly looking to lure people such as Morsi. But even if she were interested, odds are the banks would have no way other than in-house, institution-specific criteria (usually based on salaries) that would allow them to judge how much they could safely loan her: Today, they have no means of accessing an applicant’s complete credit history.

Out With the Old?

Originally named Estealam but now dubbed iScore, the credit bureau is launching an awareness campaign to assuage consumers’ fears of the banking industry and of borrowing from banks. At the same time, it is trying to establish a secure, reliable system for banks to offer loans.

The name change is meant to reassure borrowers: Refaat says that Estealam gave people the impression of inquiring or investigating, which was not an accurate portrayal of the credit bureau’s main mission.

“We are here in order to encourage individuals [] to score better. To score [better means they] will have a higher rating. It’s iScore: [it’s] about a person, about the individual saying ‘I’m scoring better,’ so he can get better service.”

The awareness campaign will explain how a credit bureau works and its advantages for both creditors and debtors, but Refaat told Business Today Egypt he also wanted to highlight the bureau’s partnership with the International Finance Corporation (IFC), the private-sector arm of the World Bank.

The IFC ranked Egypt 165th out of 175 surveyed economies on the ease of doing business in its Doing Business 2006 report, higher than Sierra Leone (168) and Eritrea (170) but lower than Senegal (146) and the West Bank of Palestine (127). In the “Getting Credit” section of the report, Egypt scored only slightly better, at 160. In every measurement of credit — scope, accessibility and quality of information — Egypt is lower than the regional averages.

Working in cooperation with the financial sector, the IFC helped policymakers study the feasibility of launching an Egyptian credit bureau. It also prepared the request for proposals made to international experts and assisted in writing up the bureau’s business plan. If all goes well, iScore will facilitate the rapid improvement of the nation’s credit facilities and, ultimately, give Egypt leverage to get a higher score in the next Doing Business report.

Industry insiders expect a number of measurable changes to take place by the time the credit bureau is fully functional in June. The government has been taking steps to improve how the legal system handles financial disputes as it lays the legal and judicial training groundwork for commercial courts to handle everything from complex economic issues to common bankruptcy cases — in other words, the courts that will adjudicate the rights and responsibilities of everyone in the borrowing cycle. As a further step towards making electronic payments a viable solution, the Central Bank of Egypt (CBE) has created a legislative framework to allow data sharing between financial institutions.

“With the credit bureau just established in Egypt, I think over a short period of time there is going to be a strong and reliable database to allow creditors to issue more sound decisions [on extending] lines of credit,” says Tarek El-Housseiny, Visa International’s vice president and general manager for Egypt and Libya. “That will mean fewer issues and challenges on payback, [so] default rates will improve. That means more people can get credit based on a scientific, consistent way of establishing the creditworthiness of a person. This is a very important milestone in this industry.”

Credit history is the primary means of determining whether or not to grant a line of credit, but as it stands today, there is no official database of anyone’s credit history in the country. The only entity that tracks this information is the National Bank of Egypt, which only gathers data for loans of more than LE 30,000 from banks who report problems such as missed payments from borrowers.

iScore will monitor both the negatives, such as missing a scheduled payment, and positives, like paying on time. Once this database is complete, anyone should be able to walk into a bank and easily apply for a loan.

“I wanted to get a loan from [a bank],” Morsi says. “I got a lot of papers, and they’re asking abut your visa, about your work papers, about your money, about your salary, how much you make — and some people cannot get their loans.”

This hassle is exactly what iScore hopes to eliminate with its information collection abilities.

The Big Picture

The whole system is contingent upon the government completing its national identification project. For a lender to access an individual’s credit record, it must submit a distinguishing piece of information such as an ID number. The credit bureau also has to get all the lenders to consistently report their information, which includes borrowers’ names, addresses and dates of birth.

By June, iScore will have information about the national credit status from the country’s largest lenders — state-owned banks, Commercial International Bank (CIB, bt100 number 13, the nation’s largest private lender), HSBC, Piraeus and the Social Fund for Development.

Representatives from these institutions, Refaat and two other unnamed individuals make up iScore’s board of directors. Refaat was tapped to head the credit-information service for his financial and technical background as a CIB strategic planner and as a board member of the Egyptian Company for Automated Bill Processing Systems (GiroNil) — a public-private partnership established in 2005 between Banque Misr, Egypt Post, CIB and Netherlands-based inClusion Group.

When Refaat talks about the banking sector’s IT systems, he draws on a wealth of knowledge that helped him foresee the challenges posed by widely varying technological capabilities in Egyptian banks. “Banks can vary from a well-disciplined, high-tech organization to whatever you can imagine,” he says. “So the scale is very large.”

The most sophisticated financial institutions will have a direct link to the credit bureau. For example, Vodafone Egypt (bt100 number 5) is about to roll out Vodafone Cash, allowing subscribers to make cash transfers via SMS. The company was the first to ask for a high-tech computer-to-computer link, known as Advanced Program Interface.

Refaat considers mobile operators important clients because their post-paid service essentially makes them moneylenders: They grant the mobile line and collect their money at the end of the month, not unlike a credit card company. The vast majority of mobile business in the country comes from pre-paid sales, but a proper credit rating system can change that.

“Both [mobile operators] need to join, not just one,” Refaat says. “Post-paid [service] is easy if you have right information in place. In terms of checking prompt payments — a disciplined guy, the computer will score him higher.” The mobile operators can pay for iScore’s services and get access to the credit ratings; based on that information, they can decide to approve an individual’s request for post-paid service.

Refaat says the benefits of providing more credit will eventually trickle down to the regular guy on the street who might not have proper paperwork to secure a loan from the bank. With an electronic system, the would-be borrower wouldn’t need any papers because all the relevant information is right there on the computer — not that this should discourage people from maintaining accurate records, of course.

The credit bureau will have a dispute-resolution system to guarantee people the right to challenge perceived errors on their records. On the credit report, information being disputed will be highlighted. The banks are expected to follow a specific time frame with their claim as well.

A transparent and equitable system will encourage banks to extend more credit because their risk will be minimized. In theory, this should also encourage preferential lending rates and a bouquet of services the consumer can choose from.

“If you have LE 1 billion working around as cash, imagine if you brought that [sum] to the financial sector,” Refaat says. “How much money can you [lend] out and how much money can be [generated] out of it? There is a money-creation cycle. Cash doesn’t create cash. If it is in the system, it will create money.”

For the regular consumer, the most important way to build a solid credit history is to pay several bills on time. The personal credit rating takes reliability into consideration, so a person with few assets can earn trust to get larger loans. Both the number of borrowers and the value of loans will increase, and eventually small and medium-sized enterprises will get access as well, under different criteria.

(According to Diners’ Club Egypt, which offers high-limit cards and services, bank lending is usually limited to 25% of a yearly salary and credit does not exceed two times the monthly salary, or 16.7% of the yearly income.)

“If I know today he is going to pay on time, but the country cannot support that industry, will you still give him a loan? Or if he has a bad sales strategy, will you still give [] him [the money]?” Refaat asks. “Of course not. Or at least you will reconsider, or you may even have a different rate to apply, because there is a different risk factor attached.”

El-Housseiny says that the goal is to eliminate the informal sector by making all financial transactions transparent to the government, which taxes the vendors. “[The merchants] —with all the new regulations and laws that restructured taxes in Egypt — are more open to being transparent,” he claims.

Visa spends a tremendous amount of time (and money from member banks) promoting its ease and access. For twenty years it had the same slogan, “Visa: It’s everywhere you want to be.” But up until a few years ago, Visa was hardly anywhere in Egypt. Today there are about 2,000 ATMs that accept Visa.

When the credit bureau is finished gathering its information, it will have information on about 800,000 clients from the CBE. The CBE and other banks are directing their clients toward using ATM cards, which allow institutions to establish better records of client behavior.

El-Housseiny expects that 150,000 ATMs in five years will be enough to meet the need. So Visa has already started working with the three banks that offer Visa cards — National Bank of Egypt, Arab African Bank and Banque Misr — to monitor the performance of every ATM to determine patterns of failure and their reasons.

In the end, Visa benefits from training banks because it takes a few piasters from each transaction, the government benefits from more accurate records to get its taxes and the average citizen suddenly becomes a targeted consumer.

After they learn about the services available through an electronic system, some people might even end up opening savings accounts when they otherwise would have gone through a gaam’eya.

“People in Egypt never begin saving unless they have a target, like marriage, travel, a car,” Morsi says. “You should always save money. There should always be a target.”

Given that the vast majority of Egyptian consumers have no access to credit, there might be something to learn from Grameen Bank. Founded by 2006 Nobel Peace Prize laureate Mohamed Yunus, Grameen Bank introduced the concept of micro-credit as a commercial service to the overwhelmingly poor population of Bangladesh.