DFIs have always been important providers of funding. What are their roles — and expectations — moving forward? Egypt has enjoyed big inflows of equity and debt finance from a veritable alphabet soup of development finance institutions, since 2011, with funds serving the private sector at least as much as the government.

We discussed the role of DFIs today as investors and drivers of the private sector and ESG regulations at the Enterprise Finance Forum with Ahmed Sobhy, CIO at Banque Misr, Ahmed El Alfi, founder and chairman Sawari Ventures, and Menna Zekrallah, senior banker manufacturing and services at the European Bank for Reconstruction and Development (EBRD).

A reliable source of FX: “DFIs remain an important part in the funding mix for any project as a source of foreign currency,” said Sobhy. “Today, a lot more of Egypt’s debt is going to multilateral organizations like DFIs versus fully commercial investors.” Yet, their role is changing, said El Alfi. Whereas in the past DFIs have brought in capital and activated local capital with a sense of reassurance, today we don’t require DFI validation for a project to go ahead, as local institutions have the appropriate skill set to evaluate projects and make decisions independent of DFIs.

Breaking molds: “As an institution that’s some hundred-years-old and has been operating in a very strict, rigid way in terms of how it looks at loans, the help that Banque Misr got during those earlier years helped us be ready for the world of sustainable finance,” said Sobhy.

Supporting on-lending: Now Banque Misr also wants to develop its on-lending operations. “Our MSME portfolio is around EGP 50 bn, with 140k borrowers. It’s about finding the USD for imports and that’s where DFIs are stepping up today. We’re coming up with creative structures in terms of how we can extend those on-lending tenors – things like bonuses, introducing more of the grant element to funding so that the customers are wanting to take that lending on more. Obviously high interest rates and lack of USD are hampering this growth a little bit.”

EBRD wants to be a facilitator: “When there are good opportunities, we have to catalyze more investments from the international community, but very much so working with local banks,” said Zekrallah. “We view local banks and commercial banks as our partners and they are a key lever of how we can multiply our mandate and widen our reach in Egypt, whether through credit lines, specifically for women, land businesses, more inclusive youth and employment or a wider reach of MSMEs.”

SME split: “Today our portfolio is split 50% towards mid-size enterprises and 50% towards the smaller enterprises, and within that we have created tailored programs, including a program just for female entrepreneurs called Zaat,” Sobhy added. The bank also operates a digital product, SME Express, which encompasses 45% of its entire portfolio, he added. “If you give clients a digital product, they’ll use it — and it’s reduced our cost of service significantly. It’s an experiment that shows that financial inclusion can work and when you deploy technology at scale, people pick it up.”

Joint ventures can come in handy, as Midar — in which Banque Misr and the National Investment Bank together hold nearly 75% — has done after implementing a new strategy, Sobhy added. “They’ve been able to attract a couple of international investors that are going to come in and do JVs with them, that’s the kind of thing you want to see, that kind of discipline. If you see that across the entire portfolio or entire program the results will be much better.”

Driving a global green transition: By 2025, 50% of EBRD’s global annual investments will be green, Zekrallah said, a target that the lender hit last year with EUR 30 bn in investments. The transition starts in policy. “We try to be very close to the design and implementation of green programs to make sure that all stakeholders, not just the government but also corporate associations, are on board, when they design the regulations, so that the programs are implementable, fit for purpose and relevant.”

At home: In Egypt, the EBRD has been working with the government on the draft green hydrogen strategy, by mobilizing consultants, a strategy the lender frequently implements, with 93% of all its co-investment grants and loans between 2018 and 2020 for green projects. The green hydrogen strategy, Zekrallah added, “would unlock further investments from the private sector as well as from international investors.”

ESG is good for business: “Every one of our companies has ESG training and monitoring,” El Alfi said. “That’s one of the things that I credit the DFIs for is setting that standard that we all picked up because it ended up being good for us and good for business. Companies that comply are the ones that perform the best.” Yet climate remains a ‘filter’ not a ‘focus’ for companies in Egypt, he thinks. “I don’t know that the depth of the market is there for climate focused businesses yet but it is definitely a filter that can be applied and trained to all our companies.”

Egypt is on an ESG journey – but not everyone is on the same route: The presence and awareness of ESG has evolved since 2020 from asking if a company has the basic environmental permit to conducting ESG due diligence, said Sobhy, and as a bank, Banque Misr is doing more to ensure ESG standards are upheld. “If someone says I’m going to improve the efficiency of energy efficiency in my factory by installing this, they come and calculate what that looks like and then report on it.”

Getting everyone on board needs more work: “For family owned businesses and businesses that have run for a long time, ESG seems like a distraction,” Sobhy said. “What’s important is to be transparent; they need to see a benefit, such as from the structure of financing they get.”

Lacking ESG could equal fewer funds: If companies don’t know what the ESG standards are, it could hinder access to DFI capital, Zekrallah said, agreeing that knowledge about ESG standards and requirements is limited in Egypt. To combat this the EBRD tries to decarbonize certain sectors in a systematic way, designing low carbon pathways (LCP) with stakeholders that evaluate an industry from an ESG point of view. Currently, the lender has completed an LCP for the cement industry and is working on doing the same for ammonia.

Egypt’s green bond market is yet to unlock its full potential: “Green bonds are a very interesting idea,” thinks Sobhy, yet the pricing advantage is lacking. “DFIs are currently the market for Egyptian green bonds and I might as well go and do this directly. It’s lower cost, I don’t need to pay for a rating or any of the other things that come with doing a green bond.”

The EBRD is behind green bonds: “It’s a bit of a change in the mindset of how corporates behave and think and it comes with a cost, so people tend to think that this is a luxury,” says Zekrallah. Yet one solution could be to widen the access to a pool of investors not currently looking at that particular sector, she suggests. Earlier this year the EBRD anchored the first green bond for Scatec to back its solar plants in Egypt, mobilizing funds from other DFIs and attracting a pool of international investors. The projects could also be subsidized by DFIs, which view green funds as innovative and sustainable linked loans.

High risk, reliable investors: DFIs are willing to provide the funds for projects other investors would steer clear of, thinks El Alfi, they are key for financing big, creative projects in Egypt. Lenders like EBRD are willing to invest in long-term commitments, even in times of volatility, and in calmer times looking to prepare businesses for future bumps in the road, Zekrallah added.

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