Consolidate or go bust — is Egypt’s NBFI industry a bubble that’s about to burst?The past five to seven years has witnessed an explosive rise of non-bank financial services in Egypt.

We brought together a panel of experts from Egypt’s NBFI industry to discuss the current landscape during the Enterprise Finance Forum. Joining us were Hazem Moussa (co-founder and chairman of Contact Financial Holding), Amro Abouesh (who founded and led microfinance player Tanmeyah, and who now leads Maseera), and Tamer Elemary (CEO of GB Capital).

Setting the scene: There is considerable overlap between banks and NBFIs as consumer lenders, Moussa said. “NBFIs are an extension of the [banking] system and a core part of the development of the market. Egypt has a low banking concentration and very low credit mark, so NBFIs can fill the gap to reach more people in a different way and help banks extend their services and their balance sheets,” he added. “[They] should work together to support each other, it’s one ecosystem.”

Customers are led by need: “When you're looking at the larger corporate side of the equation, [banks and NBFIs] are competing for maybe under 200 companies out there in the market. When you get to the consumer side of the equation, it's probably quite complementary,” said Elemary. NBFIs have a chance to extend into geographies and certain sectors of the consumer business that banks don’t want to play in — the choice is up to the customer with considerations given to reputation, fees, rates, timing needs and pace among other things, he added.

Cooperation, not competition: Banks are the primary providers of funding to non-bank financial institutions — and so a major reason why the sector has grown so fast, Abouesh said. “Most banks have an NBFI arm or are venturing into digital banking as we are addressing the same target. Securitization provides one avenue for cooperation, although it depends on who buys the securities. If you’re securitizing to a bank, it’s the same thing — different books, but the same entity. You can achieve diversification on the funding source when it comes to securitization by allocating assets on different types of institutions.”

The case for overlending: “There’s a credit market cycle that people must be aware of,” Abouesh said. The NBFI market has grown, but players are cramming into a small space with vanilla offerings to sell money quick, he explained. “What happens in this situation is there have been valuations for NBFIs, and it drew the attention of a lot more money wanting to come in with a very high level of overconfidence in the market and that everything will sell,” Abouesh said. This leads to oversupply and multiple lending to the same borrower. “In microfinance there are at least two loans per borrower. The CAGR of growth — the measurement of future economic activity that demonstrates the potential for rapid growth — on the microfinance outstanding portfolio in the past six or seven years is tenfold that of the active borrowers,” he said.

Does this lead to consolidation? “There is a correction that's going to happen, and it's happening already. The overfunding that was available in the market recently has made too many players extend too many loans very quickly and this signals some form of correction. Consolidation is one way, bankruptcy is another — or a combination of both,” Abouesh said.

Not by choice: “Consolidation can come when you have a mature market with companies that have grown well organically and are now struggling to continue at the same rate, or when you have a stressed market impacted by pressure from a liquidity standpoint. I think that’s what we are probably seeing — not only in Egypt, but on a global level,” Elemary said. “It’s a case of consolidation not by choice, but because of the market dynamics. Small companies in particular are going to have to find some way to get bailed out. They can look to bankruptcy or M&A becomes one of those ways that it happens.

Are NBFIs taking on too much risk? The number of people with access to credit remains very small, Moussa said. In terms of risk, those that struggle may not have the right strategy. “It really depends on what your strategy is in terms of market penetration — are you looking at the customer or a product, are you looking at trying to maximize your value or are you building more long term?” he asked.

There’s room to grow, but you need to innovate: “Now is the time to be more innovative and work harder to be able to customize and tailor make products that serve people and tackle the rest of the market niches,” said Abouesh. While the market is massively underserved, it is congested as NBFIs have flooded into parts of the market where traditional banks were not reaching the majority of people, he added.

SMEs hold untapped potential: “SMEs are such a large market and the market is completely untapped. So what better combination for a business plan to grow?” Elemary said. Plus, this wouldn’t be stepping on the toes of banks. “I don’t think we're doing anything necessarily to bump into each other on the SMEs side, being that it's a very nascent space,” he added.

Take a hybrid approach: “We used to think about SMEs as companies that behave more like consumers because they were owned by an individual and we tended to put the SME businesses in the consumer divisions. Coming into lending now, I see that it needs to be a little bit more of a hybrid. We need to approach the SMEs with a consumer mindset, but we need to assess the SMEs with more of a corporate perspective in terms of creditworthiness,” Elemary said.

Thinking ahead: “A paradigm shift in technology has affected people's expectations of the kind of service that they need,” Abouesha said. The generations coming up in the market don’t expect to physically go to a bank branch to conduct transactions. “We need to develop the right kind of empathy level for client needs, whether or not they know they need a service that exists to fulfill those needs.”

Serving the underbanked: “Technology has provided a lot of analytics that were not possible before,” Abouesha said. New innovations in tech allow made-to-fit services to be accessible and delivered to the low income groups, he explained. “Banks never took private banking services to low income groups, it was simply too expensive. But now the cost of client acquisition is dramatically cut by the availing of technology,” he added.

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